Pakistan's economy shows strong gains in 1HFY26, but war risks loom large

May 12, 2026 (MLN): Pakistan's macroeconomic conditions improved significantly in the first half of fiscal year 2026, with inflation easing to a 5.2% average, external buffers strengthening on the back of SBP's foreign exchange purchases and net financial inflows, and real GDP growth running at twice the pace of the same period last year, the State Bank of Pakistan said in its Half Year Report.

However, the central bank warned that the ongoing Middle East conflict poses serious risks to the outlook, with supply chain disruptions likely to ripple through inflation, external trade, remittance flows, and broader economic activity.

The SBP credited the gains to a prudent monetary and fiscal policy mix, ongoing structural reforms, favorable global commodity prices, and the country's IMF program, according to a press release issued.

The central bank maintained an adequately positive real interest rate on a forward-looking basis throughout the period.

On the fiscal side, the government posted a surplus in H1-FY26  the first time since FY02 driven largely by a substantial reduction in interest payments, while the primary surplus held steady at last year's level.

National CPI inflation at 5.2% came in roughly two percentage points below the same period last year, supported further by stability in the exchange rate and downward adjustments in administered electricity tariffs alongside softer international commodity prices.

Industrial activity led the economic rebound, followed by services and agriculture.

The pickup in output translated into a volume-driven rise in imports, though a significant drop in rice exports pulled down overall export earnings.

Workers' remittances continued to shoulder much of the burden, steadily rising to finance a major portion of deficits in trade, services, and primary income balance, keeping the current account deficit at moderate levels.

Looking ahead, the SBP said high-frequency indicators including the Purchasing Managers' Index, Large-Scale Manufacturing data, and construction activity showed that momentum held through February 2026 before the Middle East war began weighing on output in the remaining months of the fiscal year.

As a result, the bank now projects real GDP growth close to the lower bound of its earlier 3.75 to 4.75% forecast range for FY26.

Despite stronger economic momentum and higher commodity prices, the current account deficit is also expected to come in near the lower end of the projected zero to one% of GDP range.

However, a surge in international oil prices and its spillover into broader commodity markets is forecast to keep inflation above the upper bound of the 5 to 7% medium-term target range for most of FY27. The report also flagged multifaceted macroeconomic risks should the Middle East conflict prove extended.

Beyond the near-term, the report stressed that Pakistan's transition to a sustainable high-growth path requires deep structural reforms to address long-standing weaknesses, specifically low savings and investment, weak competitiveness, falling exports, subdued foreign direct investment, and a persistently low tax-to-GDP ratio.

A special chapter on climate change noted that while Pakistan contributes very little to global greenhouse gas emissions, it ranks as the 15th most affected country by climate events and sits among the nations with the highest vulnerability and lowest preparedness.

The report highlighted that Pakistan's emissions intensity of GDP is relatively high, reflecting structural inefficiencies and a carbon-intensive growth trajectory.

Meeting the resulting investment needs in climate mitigation and adaptation remains a major challenge, hampered by low international climate financing inflows and constraints facing both the public and private sectors domestically.

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