Central bank says geopolitical tensions, El Niño, global trade uncertainty and delayed reforms could undermine Pakistan’s economic recovery.
KARACHI: The State Bank of Pakistan (SBP) has warned that renewed geopolitical tensions, climate-related shocks, global tariff uncertainty and delays in structural reforms could pose significant risks to Pakistan’s macroeconomic outlook for fiscal year 2026-27.
In its latest assessment, the central bank said the outlook for FY27 had improved compared with its earlier assessment following the outbreak of the Middle East conflict. Inflation is now expected to be lower than previously anticipated, economic activity is projected to recover gradually and external account pressures are likely to remain moderate.
The SBP also expects foreign exchange reserves to increase further, while prudent monetary and fiscal policies have strengthened Pakistan’s resilience to external shocks.
However, the central bank cautioned that the baseline outlook remains exposed to several short- and medium-term risks originating from both external and domestic sources.
Middle East conflict remains biggest near-term risk
The SBP identified geopolitical developments as the most significant near-term external risk to Pakistan’s economic outlook.
A temporary de-escalation in the Middle East conflict in June led to a sharp decline in global oil prices and eased some supply-chain disruptions. However, the subsequent resurgence of the conflict has renewed uncertainty over commodity prices, international trade, freight costs and the broader global economic outlook.
The central bank said the eventual impact on the global and Pakistani economies would depend largely on the duration and intensity of the conflict.
The baseline projections assume a gradual normalisation of conflict-related disruptions during the second half of FY27. However, the SBP noted that this assumption remains dependent on developments in the region.
El Niño threatens food inflation and external account
Climate-related shocks have also emerged as a significant risk to Pakistan’s economic outlook.
The SBP said current meteorological assessments indicate a higher probability of El Niño-related weather disturbances during the forecast period.
Although the timing and severity of such weather events remain uncertain, abnormal temperatures and rainfall could adversely affect agricultural production and increase food inflation.
A decline in domestic agricultural output could also raise Pakistan’s import requirements while reducing food exports, potentially placing additional pressure on the external account.
Global tariffs threaten export prospects
The central bank also warned that changes in global tariff policies could affect Pakistan’s export performance.
The ongoing realignment of global trade is reshaping supply chains, trade patterns and export competitiveness. Pakistan could benefit from trade diversion in some markets, but the SBP noted that the country already faces strong competition from regional exporters, particularly in textiles and food products.
Weaker global demand and intensified competition could therefore limit the potential benefits from trade diversion.
The ultimate impact will depend on the pace of global trade normalisation, the tariff treatment of Pakistani exports and the ability of domestic businesses to adapt to changing international market conditions.
Structural reforms remain critical
The SBP stressed that the recent improvement in Pakistan’s macroeconomic stability provides an opportunity to accelerate structural reforms aimed at sustaining higher growth and reducing economic vulnerabilities.
Fiscal reforms remain particularly important. The central bank said broadening the tax base, improving revenue mobilisation and maintaining primary fiscal surpluses over the medium term are essential to strengthening fiscal sustainability.
Pakistan’s tax-to-GDP ratio remains relatively low compared with many peer economies, according to the SBP. Expanding the tax base while reducing distortions and encouraging productive and export-oriented sectors could help improve the country’s fiscal position.
The central bank also identified Pakistan’s weak export base as a key vulnerability, leaving the external sector exposed to global commodity prices and changes in international tariffs.
Although the government has introduced performance-based rebates and other incentives for exporters, the SBP said sustainable export growth would require structural reforms to improve the business environment, increase productivity and reduce dependence on imported energy.
Policy discipline needed to protect recovery
The SBP said managing these risks would require continued prudent macroeconomic policies.
The current policy mix of fiscal prudence, positive forward-looking real interest rates and improved foreign exchange reserves has strengthened Pakistan’s resilience against near-term vulnerabilities.
However, the central bank stressed that macroeconomic stability alone would not be sufficient to secure sustainable economic growth.
It called for faster structural reforms to increase productivity, broaden and diversify exports and export markets, and expand the tax base.
Continued progress on these fronts, the SBP said, will be essential to strengthening Pakistan’s resilience and creating the conditions for higher and sustainable economic growth during FY27 and beyond.