The State Bank of Pakistan has projected real gross domestic product growth of 3.5% to 4.5% for fiscal year 2027, while warning that inflation is likely to remain elevated during the first half of the fiscal year before gradually easing toward the upper end of its medium term target range. The projections were published in the State Bank of Pakistan’s Monetary Policy Report for August 2026, which reviews Pakistan’s economic performance during fiscal year 2026 and assesses the outlook for the year ahead. The report said Pakistan’s macroeconomic conditions were significantly influenced by global economic and geopolitical developments during the second half of FY26, particularly the sharp rise in global energy prices and supply chain disruptions.
According to the report, Pakistan’s real GDP growth reached 3.7% in FY26, close to the lower end of the forecast range issued after the January 2026 Monetary Policy Committee meeting. Economic activity had gained momentum during much of the fiscal year, with real GDP growth averaging 4.0% year on year during July to March FY26. However, growth momentum weakened during the final quarter as higher energy prices, supply chain disruptions and government austerity measures affected economic activity. For FY27, the central bank expects growth to recover gradually, supported by budgetary incentives and continued macroeconomic stability.
Inflation remains one of the central concerns highlighted in the report. Headline inflation averaged 5.5% between July and February FY26 and remained within the State Bank of Pakistan’s 5% to 7% target range during that period. However, inflation increased substantially during March to June, averaging 10.2%, resulting in average annual inflation of 7.1% for FY26. The State Bank of Pakistan expects inflation to remain elevated during the first half of FY27 because of higher global commodity prices, potential domestic food price pressures and the possibility that higher energy costs could feed into core inflation. At the same time, moderate domestic demand, contained inflation expectations and an expected normalization in global fuel prices are expected to help inflation decline gradually and stabilize near the upper end of the 5% to 7% target range by the end of FY27.
The monetary policy report also outlines how the central bank responded to changing economic conditions during FY26. The Monetary Policy Committee had initially maintained its assessment that inflation would remain broadly within the target range. However, the increase in global energy prices and the persistence of supply disruptions led the committee to tighten monetary policy in April 2026. The policy rate was increased by 100 basis points to contain the second round effects of the supply shock, anchor inflation expectations and bring inflation back toward the medium term target. As energy prices moderated from their peak levels and supply chain disruptions eased, the outlook improved. The Monetary Policy Committee subsequently kept the policy rate unchanged at 11.5% during its June and July meetings, while assessing the real policy rate as sufficiently positive to guide inflation toward the target range.
Pakistan’s external position remained comparatively stable during FY26. The current account stayed broadly balanced, with the deficit remaining close to the lower end of the 0% to 1% of GDP range projected at the beginning of the fiscal year. The stronger external position, together with a surplus in the financial account, allowed the State Bank of Pakistan to continue purchasing foreign exchange in the interbank market. As a result, the central bank exceeded its end June 2026 foreign exchange reserve target of $18 billion and closed the fiscal year with reserves of $18.4 billion. The report projects that the current account deficit could widen during FY27 as economic activity improves and global commodity prices remain higher, but expects the deficit to remain within the 0% to 1% of GDP range.
The central bank expects resilient workers’ remittances, stronger exports of goods and services and planned official inflows to support the country’s external position during FY27. SBP foreign exchange reserves are projected to reach $20.20 billion by the end of December 2026, with further improvement expected by June 2027. The report also notes that Pakistan surpassed its original end June reserve target despite the external pressures experienced during the fiscal year. However, the report points out that reserves subsequently declined to $17.0 billion as of July 31 following sizeable debt repayments, highlighting the continuing importance of external financing and reserve accumulation.
The State Bank of Pakistan has identified several risks that could affect the economic outlook. A prolonged or wider geopolitical conflict could push global energy and commodity prices above the assumptions used in the central bank’s baseline projections, placing additional pressure on inflation, economic activity and Pakistan’s external account. Climate related developments, including worsening El Niño conditions and floods, could also affect agricultural output, food prices and the current account while creating additional fiscal requirements. The report further warns that delays in structural reforms could weaken exports, slow productivity gains and constrain Pakistan’s ability to achieve stronger economic growth without creating additional inflationary and external sector pressures.
Despite these risks, the State Bank of Pakistan said macroeconomic stability remained intact and that the economic momentum built over the previous three years had continued. The report noted that fiscal and external buffers helped Pakistan absorb the global supply shock better than initially assessed and compared with the impact of earlier global energy price shocks. The country also returned to international capital markets during the period, including a $750 million Eurobond issuance in April 2026 and approximately $250 million in Panda bonds in May. The report also noted that Standard & Poor’s upgraded Pakistan’s sovereign credit rating to B from B-.
The August 2026 Monetary Policy Report therefore presents a cautiously positive outlook for Pakistan’s economy, with growth expected to recover during FY27 while inflation remains the key near term challenge. The State Bank of Pakistan has emphasized that strengthening fiscal and external buffers, maintaining prudent monetary policy and implementing structural reforms will remain important for improving the economy’s resilience. According to the central bank, these measures will be critical for supporting productivity, strengthening exports and creating conditions for higher and more sustainable economic growth in the coming years.
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