- SBP expects GDP growth to remain between 3.75% and 4.75%.
- Increased energy prices, freight costs could increase import bill: SBP.
- Energy price rise has implications for tax, non-tax revenue: SBP.
The State Bank of Pakistan (SBP) warned on Tuesday of significant risks to the country’s economic outlook due to the conflict in the Middle East, saying increased energy prices and supply chain disruptions could weigh on the macro economy.
The central bank made the observations in its Half-Yearly Report 2025-26 showing that Pakistan’s macroeconomic stability strengthened in the first half of the financial year despite uncertainty on the global stage.
However, the report said “increases in energy prices, supply chain disruptions and increases in freight costs and insurance premiums could weigh significantly” on the country’s macroeconomic outlook during the 2026 fiscal year.
The SBP noted that the rise in international energy prices was immediately passed on to domestic inflation despite the government’s decision to initially absorb the bulk of the increase.
However, its impact on overall economic activity is not expected to be significant in FY2026, it said.
The central bank expected real GDP growth to remain near the lower end of the forecast range of 3.75% to 4.75%.
It said the increase in food crop production and limited export opportunities due to regional conflicts are likely to moderate food inflation.
However, the SBP warned that energy inflation will rise after the government passed on the rise in international oil prices following the outbreak of war in the Middle East.
“Oil price shocks also pose significant upside risks to core inflation via increased cost pressures, second-round effects and inflation expectations,” it said.
National inflation likely between 5% to 7%
The development, the central bank said, indicated that national CPI inflation is likely to remain above the upper end of the medium-term target range of 5% to 7% in the remaining months of FY26 and in FY27.
Similarly, the sharp rise in energy prices and increased insurance and freight charges are also expected to inflate Pakistan’s import bill and freight service payments, it added.
But the government’s decision to pass on the impact of an increase in oil prices to domestic energy prices, along with fuel-saving measures, is likely to help curb domestic demand and thus reduce the amount of energy imports.
The central bank expected a further drop in liquefied natural gas (LNG) imports to reduce energy imports.
Exports are also expected to remain weak due to the possibility of slower global economic growth, perennially low rice prices, closure of Pakistan’s western border and realignment of global trade flows due to ongoing tariff adjustments, the SBP said.
Workers’ remittances may also be affected in the fourth quarter of FY26, given that remittances from the Gulf Cooperation Council (GCC) countries contributed about 55% of total remittances between FY21 and FY25.
However, remittances are expected to remain strong in FY26 on a full-year basis, partially offsetting the widening trade deficit.
Consequently, the current account deficit in FY26 is expected to remain close to the lower end of the range of 0 to 1% of GDP.
Likely impact on PDL collection
The war and the rise in energy prices have implications for tax and non-tax revenues and the government’s discretionary expenditure, the SBP said.
“Particularly, the adjustment in domestic fuel prices vis-à-vis an increase in global oil prices is likely to increase energy subsidies. Moreover, PDL collection may also be affected due to reduced POL sales (volume effect) following the increase in POL prices and implementation of energy conservation measures,” it added.
According to SBP, the government’s decision to reduce the development budget may mitigate the impact to some extent.
The SBP in its report expected a fiscal deficit in the range of 3.5% to 4.5% of GDP.
Meanwhile, it said lingering impacts of war on supply chain resumption and global economic activity could pose significant challenges to macroeconomic stability in the medium term, despite the near-term outlook looking broadly stable.
The central bank maintained that slower economic activity – amid an uncertain situation in the Gulf economies – could affect remittances, helping to finance trade deficits and support currency market stability.
In addition, disruptions in the supply chain – particularly the import of critical raw materials and machinery – could affect industrial production as well as exports, it said, adding that fertilizer shortages could affect crop yields.
