Pakistan’s macroeconomic outlook for fiscal year 2026-27 has improved compared with the assessment made by the Monetary Policy Committee following the outbreak of the Middle East conflict, according to the State Bank of Pakistan’s Monetary Policy Report for August 2026. The central bank expects inflation to remain lower than previously projected, economic activity to recover gradually and pressures on the external account to remain moderate, while foreign exchange reserves are expected to increase further. The State Bank of Pakistan said continued implementation of prudent monetary and fiscal policies has strengthened the economy’s ability to withstand shocks compared with previous years. However, the improved baseline outlook remains exposed to several short and medium-term risks from both domestic and external sources. The duration and intensity of the ongoing Middle East conflict, adverse climate conditions, uncertainty surrounding global tariff policies and possible delays in structural reforms have been identified among the major factors that could affect the economic trajectory during FY27. The central bank noted that geopolitical developments represent the most important near-term external risk, as changes in the conflict can influence global commodity prices, international trade, freight costs and supply chains. The temporary de-escalation of the conflict in June resulted in a sharp decline in global oil prices and some easing of supply chain disruptions, but the subsequent resurgence renewed uncertainty over the global economic environment. The duration and intensity of the conflict will therefore remain important determinants of its impact on Pakistan and the wider global economy.
Climate-related developments also remain a significant source of uncertainty for Pakistan’s FY27 economic outlook, particularly because of their potential impact on agriculture, food prices and the external account. Current meteorological assessments indicate a higher probability of El Niño-related weather disturbances during the forecast period, although the timing and severity of any such developments remain uncertain. The State Bank of Pakistan noted that adverse weather conditions, including unusual temperature and rainfall patterns, could affect agricultural production and contribute to higher food inflation. Lower domestic production of agricultural crops could also increase the country’s import requirements while reducing food exports, creating additional pressure on the external account. These risks come alongside uncertainty in global trade and tariff policies. The State Bank of Pakistan said global tariff policies, including measures initially announced by the United States in early 2025, continue to pose a risk to the macroeconomic outlook as the process of global trade realignment remains underway. Changes in tariffs and trade arrangements can influence global supply chains, trade patterns and the competitiveness of exporters. For Pakistan, the evolving environment could create opportunities through trade diversion, allowing some export sectors to gain market share in destination markets. However, Pakistani exporters already face strong competition from regional economies, particularly in textiles and food products, meaning weaker global demand and increased competition could restrict the potential benefits. The ultimate effect will depend on the pace of global trade normalization, the tariff treatment applied to Pakistani exports and the ability of domestic businesses to respond to changing market conditions.
The State Bank of Pakistan also highlighted delays in structural reforms as a risk to the country’s medium-term economic stability. The improvement in macroeconomic conditions over the past two years provides an opportunity for Pakistan to accelerate reforms needed to support stronger economic growth and reduce vulnerabilities. The central bank said recurring supply shocks in recent years have made these reforms more important, particularly in the fiscal sector. Continued fiscal reforms are required to broaden the tax base, improve revenue mobilization and support the government’s objective of maintaining primary fiscal surpluses over the medium term. Pakistan’s relatively low tax-to-GDP ratio compared with several peer economies makes expansion of the tax base an important component of fiscal sustainability. The State Bank of Pakistan noted that broadening the tax base while reducing distortions and creating stronger incentives for productive and export-oriented sectors could improve the fiscal position. The external sector also requires structural improvements, as Pakistan’s exports remain low relative to the size of the economy. This leaves the country more exposed to changes in global commodity prices and tariff policies in major export destinations. The government is taking measures to support export-oriented sectors, including performance-based rebates and other incentives for exporters, but the central bank stressed that a sustained increase in exports will require broader reforms. Improvements in the business environment, lower dependence on imported energy, higher firm productivity and greater export competitiveness will be important for developing a more sustainable export-led growth model.
The Monetary Policy Committee has also assessed the potential inflationary impact of a wide range of scenarios, with the medium-term inflation risk reflected in the uncertainty surrounding the baseline forecast. The risk assessment considered both favorable and unfavorable movements in global energy and food prices, including possible changes arising from the Middle East conflict and the potential effects of El Niño on agricultural prices and the external account. The committee also considered the possible inflation impact of unexpected adjustments in administered energy prices and potential fiscal slippages. These factors could alter the inflation path from the baseline forecast and influence the broader economic outlook. The central bank’s assessment indicates that the improved FY27 outlook should therefore not be viewed independently of the risks surrounding the economy. Global developments can affect energy prices, trade flows and freight costs, while domestic climate conditions can influence agricultural production, food inflation and import requirements. At the same time, fiscal developments and progress on reforms can determine how effectively Pakistan responds to these external pressures. Managing these risks will require continued prudent macroeconomic policies, particularly as the economy remains exposed to supply-side shocks and changes in the global environment. The State Bank of Pakistan has emphasized that maintaining stability while addressing underlying structural weaknesses will be important for ensuring that the recent improvement in macroeconomic conditions continues.
The current policy mix, characterized by fiscal prudence, positive forward-looking real interest rates and improved foreign exchange reserves, has strengthened Pakistan’s resilience against near-term macroeconomic vulnerabilities, according to the State Bank of Pakistan. The central bank, however, said these measures need to be accompanied by faster progress on structural reforms aimed at raising productivity, expanding and diversifying exports and export markets, and broadening the tax base. Further progress in these areas will be important for reducing the economy’s exposure to external shocks and strengthening its capacity to sustain higher growth. The outlook for FY27 has therefore improved from the assessment made immediately after the Middle East conflict began, with lower inflation, gradual recovery in economic activity and moderate external account pressures forming part of the current baseline scenario. At the same time, the State Bank of Pakistan has cautioned that geopolitical uncertainty, climate-related disruptions, global tariff developments and delays in structural reforms could alter the outlook. The central bank expects foreign exchange reserves to continue increasing, but maintaining this improvement will require stronger export performance and continued policy discipline. According to the report, sustaining macroeconomic stability will depend not only on managing immediate risks but also on implementing reforms that improve productivity, strengthen fiscal sustainability and build a broader export base. Continued progress on these fronts will be essential for Pakistan to strengthen economic resilience and create conditions for higher and more sustainable economic growth in FY27 and beyond.
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