ME war, El Niño, reform delays increase risks

Economy absorbs energy shock but faces fresh geopolitical and climate risks: SBP

KARACHI:

Pakistan's macroeconomic outlook remains vulnerable to a prolonged or widened Middle East conflict that could keep global oil, freight and insurance costs elevated, the State Bank of Pakistan warned in its August 2026 Monetary Policy Report.

The report also highlighted stronger El Niño conditions and possible floods that risk disrupting agricultural output, pushing up food prices and widening the current account deficit. Delays in structural reforms would leave the economy more exposed to supply shocks. Global tariff uncertainty and intensifying competition in textiles add further pressure on external earnings. Provisional data shows real GDP grew 3.7% in FY26, while average CPI inflation settled at 7.1%. The current account remained nearly balanced at a deficit of just 0.03% of GDP, helped by record workers' remittances and resilient ICT exports. SBP reserves closed the year at $18.4 billion, above the $18 billion target.

The Middle East conflict drove a sharp rise in energy prices. Inflation averaged 10.2% in March-June after remaining within the 5-7% target range earlier in the year. The Monetary Policy Committee raised the policy rate 100 basis points to 11.5% in April to anchor inflation expectations. The rate was kept unchanged in June and July as energy prices moderated.

SBP projects average inflation of 5.5-7.5% in FY27. Prices are expected to ease toward the upper bound of the medium-term target by the end of the year, supported by anticipated normalisation in global fuel prices and moderate domestic demand. Real GDP growth is forecast in the 3.5-4.5% range, with recovery underpinned by tax incentives, tariff rationalisation, continued private-sector credit expansion and higher sugarcane output.

Private credit maintained an upward trajectory through FY26 across working capital, fixed investment and consumer financing. Lower budgetary borrowing from banks supported this expansion. The current account deficit is expected to widen modestly in FY27 but remain within 0-1% of GDP. Reserves are targeted to reach $20.2 billion by December 2026, aided by planned official inflows and resilient remittances projected at $44 billion. The report noted that buffers have strengthened relative to the 2022 energy shock, enabling Pakistan's re-entry into international capital markets through Eurobond and Panda bond issuances.