- SBP expects GDP growth to remain between 3.75% and 4.75%.
- Hiked energy prices, freight charges could inflate import bill: SBP.
- Energy price hike has implications for tax, non-tax revenue: SBP.
The State Bank of Pakistan (SBP) on Tuesday warned 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 macroeconomics.
The central bank made the observations in its Half Year Report 2025-26, showing that Pakistan’s macroeconomic stability strengthened in the first half of the fiscal year despite uncertainty on the global stage.
However, the report said that “increases in energy prices, the supply chain disruptions, and increase in freight charges and insurance premium could significantly weigh” on the country’s macroeconomic outlook during the fiscal year 2026.
The SBP noted that the surge in international energy prices was immediately transmitted to domestic inflation despite the government’s decision to initially absorb the majority of the increase.
However, its impact on overall economic activity is not expected to be significant in the FY2026, it said.
The central bank expected real GDP growth to remain close to the lower bound of the projected range of 3.75% to 4.75%.
It said that the increase in production of food crops and limited export opportunities due to regional conflicts are likely to moderate food inflation.
However, the SBP warned that energy inflation is set to increase after the government passed on the surge in international oil prices following the outbreak of the 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 developments, the central bank said, suggested that the national CPI inflation is likely to remain above the upper bound of the medium-term target range of 5% to 7% in the remaining months of FY26 and in FY27.
Similarly, the sharp increase in energy prices and increased insurance and freight charges are also expected to inflate Pakistan’s import bill and freight service payments, it added.
However, the government’s decision to pass on the impact of an increase in oil prices to domestic energy prices alongside the fuel conservation measures is likely to help contain domestic demand and thus reduce energy import volumes.
The central bank further expected a decline 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, multi-year 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 impacted in the fourth quarter of FY26, considering that remittances from the Gulf Cooperation Council (GCC) countries contributed around 55% of total remittances between FY21 and FY25.
However, remittances are expected to remain strong in FY26 on a full-year basis, which would partially offset the widening in the trade deficit.
Consequently, the current account deficit in FY26 is projected to remain close to the lower bound of the range of 0 to 1% of GDP.
Likely impact on PDL collection
The war and surge in energy prices have implications for tax and non-tax revenue, and the government’s discretionary spending, the SBP said.
“In particular, the adjustment in domestic fuel prices vis-Ã -vis a surge in global oil prices is likely to increase energy subsidies. Moreover, the PDL collection may also be impacted due to reduced POL sales (volume effect) following the increase in POL prices and implementation of energy conservation measures,” it added.
According to the SBP, the government’s decision to reduce the development budget could somewhat cushion the impact.
SBP, in its report, expected the fiscal deficit within the range of 3.5% to 4.5% of GDP.
Meanwhile, it said that lingering impacts of war on supply chain resumption and global economic activity could pose significant challenges to macroeconomic stability over 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 — may impact remittance inflows, instrumental in financing trade deficit and supporting stability in the foreign exchange market.
Additionally, supply chain disruptions — especially the import of critical raw materials and machinery — could affect industrial production as well as exports, it said, adding that fertilizer shortages may impact crop yields.
