Pakistan’s Economy Improved Sharply in H1 FY26 But War Poses Big Risks: SBP

Pakistan’s economy showed significant improvement in the first half of fiscal year 2026 (H1 FY26), according to the State Bank of Pakistan’s (SBP) half-year report. Inflation averaged 5.2%, down from the previous year, while real GDP growth doubled compared to the same period last year, driven by industrial activity, services, and agriculture. Foreign exchange purchases and stronger financial inflows bolstered external reserves, and the fiscal balance posted a surplus for the first time since FY2002, supported by IMF-backed reforms and cautious monetary policy. However, risks loom large, particularly from geopolitical tensions in the Middle East, which could disrupt supply chains and impact inflation, trade, and remittances. Rising workers’ remittances helped offset trade and income deficits, keeping the current account deficit manageable, but weak rice exports reduced overall export earnings. The SBP projects growth near the lower end of its earlier forecast range of 3.75–4.75% for FY26, citing external shocks and slower momentum. The report highlights structural challenges, including low savings, weak export competitiveness, and declining foreign direct investment. Pakistan’s tax-to-GDP ratio remains persistently low, further straining fiscal stability. Climate vulnerabilities also pose long-term risks, as the country—despite minimal global emissions—faces high exposure to climate-related economic disruptions. Looking ahead, inflation is expected to stay above the 5–7% target range in FY27 due to rising global oil and commodity prices. The SBP emphasizes that sustained high growth will require deeper structural reforms, including improved climate financing and adaptation strategies. While H1 FY26 showed progress, external pressures and domestic vulnerabilities could hinder long-term economic stability.