Despite headwinds from global trade-related uncertainty and domestic floods, Pakistan’s macroeconomic stability strengthened further in H1-FY26, as revealed in the State of Pakistan’s Economy, Half Year Report FY26, released on Tuesday.
The central bank report noted that the Middle East War poses significant risks to the macroeconomic outlook amid heightened uncertainty, where supply chain disruptions are likely to impact inflation trajectory, external trade and remittance flows, and the economic activity in Pakistan.
“However, its impact on overall economic activity is not expected to be significant in FY26,” SBP said.
In its report, the SBP projects real GDP growth close to the lower bound of the earlier projected range of 3.75 to 4.75 percent for FY26.
“Despite momentum in economic activity and higher commodity prices, the current account deficit is now expected to be close to the lower bound of the earlier projected range of 0 to 1 percent of GDP.
“However, a surge in international oil prices and its impact on other commodity prices are expected to keep the NCPI inflation above the upper bound of the medium-term target range of 5 to 7 percent for most of FY27,” it added.
Moreover, workers’ remittances may also be impacted in Q4-FY26, considering that remittances from the GCC countries contributed around 55 percent of total remittances between FY21-FY25, said SBP.
“However, on a full-year basis, remittances are expected to remain strong in FY26, which would partially offset the widening in the trade deficit.”
The central bank report noted that economic indicators improved significantly in H1-FY26.
The average National CPI inflation eased further, while SBP’s FX purchases and net financial inflows shored up external buffers.
“These outcomes were supported by prudent monetary and fiscal policies, ongoing structural reforms, favourable commodity prices and an IMF [International Monetary Fund] program. Specifically, SBP continued a cautious monetary policy stance, maintaining an adequately positive real interest rate on a forward-looking basis, while fiscal balance posted a surplus in H1-FY26.
“The macroeconomic stability, in turn, facilitated growth momentum,” it said.
SBP noted that the spike in energy prices and increased insurance and freight charges are also expected to inflate Pakistan’s import bill and freight service payments.
“However, the government’s decision to pass on the impact of an increase in oil prices to domestic energy prices alongside the implementation of energy conservation measures is likely to help contain domestic demand and thus reduce energy import volumes. In addition, a decline in LNG imports may further reduce energy imports.
“On the other hand, exports are 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.”
SBP revealed that the real GDP in H1-FY26 grew at twice the pace, i.e. 3.8% of the same period last year, mainly driven by a pickup in industrial activity, followed by services and agriculture sectors.
The central bank noted that the momentum in economic activity translated into a volume-driven increase in imports in H1-FY26.
“At the same time, a significant drop in rice exports led to a decline in export earnings. Nonetheless, steadily rising workers’ remittances continued to finance a major part of the deficits in trade, services, and primary income balance, helping to keep the current account deficit at moderate levels,” it shared.
The report further noted that a continued prudent policy mix, an improved external account position and stability in the exchange rate, softened international commodity prices along with downward adjustments in administered electricity tariffs led to a moderation in inflation during H1-FY26.
“The NCPI inflation averaged 5.2 percent in H1-FY26, about 2 percentage points lower compared to the same period last year,” it said.
The report also highlights that the substantial reduction in interest payments and fiscal consolidation measures turned the fiscal balance into a surplus in H1-FY26, for the first time since FY02, while the primary surplus remained at last year’s level.
SBP said that the country’s transition to a sustainable high-growth path requires deep-rooted economic reforms. “These specifically need to address the long-standing issues, including low savings and investment, weak competitiveness, falling exports, subdued foreign direct investment, and the persistently low tax to GDP ratio,” it highlighted.
On climate change, the report found that while Pakistan’s contribution to global greenhouse gas emissions is very low, it is the 15th most affected country by climatic events.
The country is also among those that face high levels of vulnerability to climate change and low levels of preparedness to deal with the ensuing challenges.
This low readiness enhances the risks to the country’s economy.
“Furthermore, Pakistan’s emissions intensity of GDP is relatively high, reflecting structural inefficiencies and a carbon-intensive growth trajectory. This requires substantial investments in climate mitigation and adaptation, which currently remain largely unmet due to low international climate inflows, and challenges to domestic public and private sector financing,” it said.