FY27 economic outlook brightens, but SBP warns of global storms ahead

August 11, 2026 (MLN): Pakistan's macroeconomic outlook for FY27 has improved relative to the MPC’s earlier assessment immediately following the outbreak of the Middle East conflict, according to the Monetary Policy Report – August 2026 released by the State Bank of Pakistan (SBP).

Inflation is projected to be lower than previously anticipated; economic activity is expected to recover gradually; and the external account pressures are assessed to remain moderate, with SBP’s FX reserves targeted to increase further.

The continued implementation of prudent monetary and fiscal policies has improved the economy's resilience to shocks relative to previous years.

Nonetheless, the baseline outlook remains subject to multiple evolving short- and medium-term risks, emanating from both external and domestic sources.

In particular, uncertainty regarding the duration and intensity of the ongoing Middle East conflict, adverse climate events, global tariff policies, and delays in the implementation of structural reforms, are major risks that the MPC has evaluated in its recent macroeconomic assessment and policy settings.

Geopolitical developments present the most important near-term external risk

Although the temporary de-escalation in the conflict in June led to a sharp decline in global oil prices and a relative ease in supply chain disruptions, the subsequent resurgence in the conflict has renewed the uncertainty around global commodity prices, international trade and freight costs.

As such, the duration and intensity of the conflict remain the key determinants of its impact on the global and domestic economy.

While the baseline projections assume a gradual normalization of conflict-related disruptions during the second half of FY27, the assumption remains subject to the evolving events in the region.

Climate-related risks, including from El Niño, warrant careful monitoring

Climate-related shocks continue to present an important risk for Pakistan's macroeconomic outlook.

Current meteorological assessments indicate higher probability of El Niño-related weather disturbances during the forecast horizon.

Although the timing and severity of these developments remain uncertain, adverse weather conditions, marked by anomalies in temperature and rainfall, could affect agricultural production and food inflation.

Moreover, lower domestic production of agricultural crops may necessitate higher imports and lead to lower food exports, placing additional pressure on the external account.

Global tariff uncertainty persists, with implications for export outlook

As highlighted in the February 2026 MPR, the evolving global tariff policies, first announced by the US in early 2025, continue to pose a risk to the macroeconomic outlook.

The process of global trade realignment remains underway, with implications for global supply chains, trade patterns, and export competitiveness across countries.

For Pakistan, these developments present both opportunities and challenges.

While trade diversion may create opportunities for some export sectors to expand market share in destination markets, Pakistan already operates in a challenging export environment characterized by intense competition from regional peers, particularly in textiles and food products.

Consequently, weaker global demand and intensifying competition from regional exporters could limit these gains.

The net impact will depend on the pace of global trade normalization, the relative tariff treatment of Pakistan's exports, and the ability of domestic firms to respond to evolving global market conditions and improve competitiveness.

Delays in structural reforms amidst recurring supply shocks pose risks to macroeconomic stability

The improvement in Pakistan's macroeconomic stability over the past two years provides an opportunity to accelerate structural reforms needed to sustain higher economic growth and reduce macroeconomic vulnerabilities.

This has become even more important in the wake of recurring supply shocks over the past few years. In particular, continued fiscal reforms remain essential to broaden the tax base, improve revenue mobilization and support the government's objective of maintaining primary fiscal surpluses over the medium term.

Given Pakistan's relatively low tax-to-GDP ratio compared to many peer economies, expanding the tax base while reducing distortions and providing greater incentives for productive and export-oriented sectors would help strengthen fiscal sustainability.

At the same time, Pakistan's exports remain low relative to the size of the economy, leaving the external sector susceptible to adverse movements in global commodity prices and tariff developments in key destinations.

In this regard, the government is taking measures to support export-oriented sectors, including performance-based rebates and other incentives for exporters.

However, for a sustainable pickup in exports, structural reforms aimed at improving the business environment and reducing reliance on imported energy are essential to enhance firm productivity and export competitiveness, which will support a more sustainable export-led growth model.

The medium-term risk profile for inflation is reflected in the probabilistic uncertainty around the baseline forecast in the fan chart.

Moreover, the MPC assessed the potential impact on inflation of a wide range of scenarios.

These included favorable and unfavorable trends in global energy and food prices, including those stemming from the Middle East conflict and El Niño’s possible impact on agricultural prices and the external account.

In addition, the MPC’s risk analysis tried to incorporate possible impact on inflation of unanticipated adjustments in administered energy prices and potential fiscal slippages.

In sum, managing these risks will require prudent macroeconomic policies.

The current policy mix, characterized by fiscal prudence, positive forward-looking real interest rates, and improved FX reserves, has enhanced the economy’s resilience to near-term macroeconomic vulnerabilities.

At the same time, this will need to be complemented by expediting structural reforms aimed at enhancing productivity, expanding and diversifying exports as well as export markets, and broadening the tax base.

Continued progress in these areas will be essential for further strengthening resilience and creating conditions for higher and sustainable economic growth.

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