SBP flags inflation uptick, cautions on external position

April 27, 2026 (MLN):  Pakistan’s central bank has cautioned that inflation is already picking up and is expected to rise further, even as it remains within the target range for now, according to remarks made by the SBP Governor at an analyst briefing.

The Governor noted that both headline and core inflation are on an upward trajectory, with external pressures particularly geopolitical tensions in the Middle East likely to add further momentum in the coming months.

On the real economy, GDP growth was recorded at 4.9% in the second quarter, indicating gradual recovery. However, external sector vulnerabilities continue to dominate the macro outlook.

Despite sizeable debt repayments, including $1.3 billion Eurobond and $3.45 billion to the UAE, official reserves have remained broadly stable.

The country also settled $21.2 billion in obligations, while around $2.4 billion is expected in rollover support, leaving approximately $1.5 billion in remaining exposure.

The SBP projected reserves at $18 billion by June 2026, though this still translates into less than three months of import cover, highlighting persistent external vulnerability.

The Governor stressed that while short-term stability has been achieved, the external position remains highly sensitive to global shocks.

Furthermore, he also highlighted that latest stress testing suggests that worker remittances for the current year are expected to remain broadly resilient at around $41 billion, only slightly below the pre-war projection of $42 billion.

Despite global uncertainty, geopolitical tensions, and shifting labor market conditions in key host countries, inflows have demonstrated notable stability providing a crucial support pillar to Pakistan’s external account.

Despite global uncertainty, geopolitical tensions, and shifting labor market conditions in key host countries, inflows have demonstrated notable stability, providing a crucial support pillar to Pakistan’s external account.

Looking ahead, however, the central bank cautioned that the ongoing conflict in the Middle East could increasingly weigh on domestic economic activity.

Spillover effects are expected to become more visible in the industrial and services sectors, particularly toward the final quarter of the fiscal year.

As a result, overall GDP growth for FY26 may settle toward the lower end of earlier projections, with subdued momentum potentially extending into FY27 depending on the duration and intensity of the conflict.

On the inflation front, pressures were already anticipated due to unfavorable base effects, but the geopolitical situation has compounded the outlook.

 A sharp rise in global energy prices has translated into higher domestic fuel costs, which are now feeding into broader price levels, especially through transport and logistics channels.

While relatively stable food supplies have helped contain food inflation, the overall impact of energy-driven costs is expected to dominate, potentially pushing inflation into double digits in the coming months.

The central bank warned that inflation could remain above its 5–7% target range for much of FY27, with risks tied to energy price pass-through, fiscal pressures, and external uncertainties.

In the external sector, recent data showed some improvement, with consecutive current account surpluses in February and March leading to a marginal cumulative surplus during July–March FY26.

This performance was largely supported by strong remittance inflows, which continued to offset pressures arising from a worsening terms-of-trade environment.

Fiscal dynamics, however, remain challenging.

Tax collection fell short of targets in March, resulting in a cumulative shortfall of Rs611 billion during the fiscal year to date.

Despite this, available financing data suggests that the fiscal deficit has remained broadly contained. Rising global oil prices have added to fiscal strain by increasing the cost of energy subsidies and necessitating domestic price adjustments.

To mitigate the impact on vulnerable segments, the government has introduced targeted support measures, though achieving the full-year primary surplus target may require tighter expenditure control.

Monetary and credit indicators point to a moderation in liquidity growth alongside gradual improvement in economic activity. Broad money supply growth has slowed, largely reflecting reduced government borrowing from the banking system.

At the same time, private sector credit has maintained steady expansion, supported by earlier policy rate adjustments. Lending activity has been broad-based, covering working capital needs, fixed investment, and consumer financing, with key sectors such as textiles, trade, and chemicals benefiting from increased access to credit.

Meanwhile, slower growth in currency circulation and bank deposits suggests easing liquidity conditions compared to earlier in the year.

The central bank emphasized that the prolonged Middle East conflict has significantly heightened risks to Pakistan’s macroeconomic outlook.

 Elevated global energy prices, rising freight costs, and higher insurance premiums on trade have all contributed to increased import bills. Persistent supply chain disruptions are further adding to external pressures and uncertainty.

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