Key Points
- Pakistan’s central bank says macroeconomic stability improved in H1-FY26
- Iran war poses risks to inflation, remittances, trade and economic activity
- GDP growth during the first half of FY26 doubled from last year’s pace
- Inflation eased to 5.2 per cent amid lower commodity prices and policy discipline
- Fiscal balance posted a first-half-year surplus since FY02
ISLAMABAD: Pakistan’s central bank warned on Tuesday that the lingering Iran war poses significant risks to the country’s economic outlook, with rising oil prices, supply chain disruptions and uncertainty threatening inflation, trade, remittance flows and broader economic activity.
In its “State of Pakistan’s Economy – Half Year Report FY26”, the State Bank of Pakistan said Pakistan’s macroeconomic stability strengthened further during the first half of fiscal year 2025-26 despite domestic floods and global trade-related uncertainty.
The report said prudent monetary and fiscal policies, structural reforms, easing commodity prices and continued support under the International Monetary Fund programme helped improve key economic indicators during H1-FY26.
However, the central bank cautioned that the Middle East conflict had introduced fresh external risks.
“Supply chain disruptions are likely to impact inflation trajectory, external trade and remittance flows, and the economic activity in Pakistan,” the report said.
According to the central bank, average national consumer price inflation eased to 5.2 per cent during H1-FY26, around two percentage points lower than the corresponding period last year.
Softer international commodity prices, exchange rate stability and lower electricity tariffs supported this inflation dip.
The report noted that Pakistan’s real GDP growth during the first half of FY26 expanded at twice the pace recorded during the same period last year.
Pick-up in industrial activity alongside improvements in services and agriculture drove the growth.
The stronger economic momentum increased imports in volume terms. However, export earnings declined because of a sharp fall in rice exports.
The report said steadily rising workers’ remittances continued to finance much of the trade deficit and services, helping contain the current account deficit at moderate levels.
The central bank also highlighted that Pakistan recorded a fiscal surplus during H1-FY26 for the first time since FY02, largely due to lower interest payments and fiscal consolidation measures.
Despite the improved macroeconomic picture, the report stressed that Pakistan still faces structural economic weaknesses, including low savings and investment, weak competitiveness, subdued foreign direct investment, falling exports and a persistently low tax-to-GDP ratio.
The report also included a special chapter on climate change, warning that Pakistan remains among the countries most vulnerable to climate-related shocks despite contributing minimally to global greenhouse gas emissions.
Discussing the outlook, the central bank said high-frequency indicators, including large-scale manufacturing, construction and the Purchasing Managers’ Index, suggested economic momentum remained intact through February 2026 before the Iran war began affecting output in the later months of FY26.
As a result, the bank now expects FY26 real GDP growth to remain close to the lower end of its earlier projected range of 3.75 to 4.75 per cent.
The report further warned that higher international oil prices linked to the conflict are likely to keep inflation above the medium-term target range of 5 to 7 per cent for most of FY27.
