Inflation, trade flows & growth outlook: ME war raises risks to macroeconomic outlook: SBP

Pakistan’s macroeconomic outlook faces heightened risks due to the war in the Middle East, according to the State Bank of Pakistan’s (SBP) Half Year Report FY26. The conflict has intensified global uncertainty, straining supply chains, remittance inflows, and economic activity. While macroeconomic stability improved in the second half of FY26, the war’s impact on oil prices and trade flows now poses significant challenges. The SBP noted that rising international oil prices have already triggered inflation, despite government efforts to absorb initial costs. Supply chain disruptions could further strain industrial production, exports, and agricultural output due to shortages of raw materials, machinery, and fertilizers. Slower growth in Gulf countries may also reduce remittance inflows, a critical source of external stability for Pakistan. Near-term economic indicators remain positive, with industrial activity—particularly in large-scale manufacturing and construction—showing growth through February 2026. However, the war’s prolonged effects could slow output in the latter part of FY26. Wheat production is expected to surpass last year’s levels, while limited flood damage to crops like sugarcane and rice supports agricultural growth. The SBP projects real GDP growth near the lower end of its 3.75–4.75% range, with food inflation moderating due to increased crop production but energy inflation rising from higher oil prices. The central bank will continue monitoring inflation and maintaining external buffers to support economic stability. Despite challenges, the report highlights resilience in key sectors, though medium-term risks remain. The government will likely introduce additional revenue measures if revenue collection weakens, potentially adding to inflationary pressures.