Central bank expects stronger economic activity and easing inflation but warns that geopolitical tensions, climate shocks and delayed reforms could pose risks.
KARACHI: The State Bank of Pakistan (SBP) expects economic growth to accelerate to between 3.5 and 4.5 percent in fiscal year 2026-27, while inflation is projected to ease and stabilise near the upper bound of the target range by the end of the year, according to its latest Monetary Policy Report (MPR).
The central bank released its biannual Monetary Policy Report in August 2026, reviewing macroeconomic developments and the outlook that shaped the decisions of the Monetary Policy Committee (MPC) since its January 2026 meeting.
The report said Pakistan’s economic outlook remained influenced by evolving geopolitical developments, particularly the Middle East conflict that erupted in late February. The conflict triggered a sharp increase in global energy prices, freight and insurance costs and disrupted international supply chains.
Despite the external shock, the SBP said macroeconomic outcomes in FY26 remained broadly within the projection ranges announced following the January MPC meeting.
The central bank attributed the relative stability to prudent monetary policy, which helped contain second-round effects of the energy price shock and kept inflation expectations anchored.
At the same time, the government maintained fiscal discipline by passing increases in global prices through to domestic markets while introducing targeted subsidies and austerity measures aimed at conserving energy.
According to the SBP, these measures helped moderate aggregate demand and keep demand-side inflationary pressures muted.
Growth outlook improves
Looking ahead, the SBP expects economic activity to gain momentum during FY27, with growth projected in the range of 3.5 to 4.5 percent.
The outlook suggests that Pakistan can sustain higher economic growth while keeping inflationary and external pressures manageable, provided macroeconomic policies remain prudent and structural reforms continue.
Inflation is expected to ease further and stabilise near the upper bound of the SBP’s target range by the end of FY27.
Current account deficit to remain contained
The external sector outlook also remains relatively stable, with the SBP projecting the current account deficit to remain within 0 to 1 percent of GDP during FY27.
A contained external deficit is expected to support continued foreign exchange purchases by the central bank and strengthen Pakistan’s reserve position.
The SBP aims to build its foreign exchange reserves to $20.20 billion by December 2026, with reserves projected to increase further by the end of FY27.
Geopolitical risks remain key challenge
Despite the improved outlook, the SBP cautioned that several risks could derail the projected economic trajectory.
The evolving geopolitical situation in the Middle East remains a major risk, particularly if it pushes global energy and other commodity prices above the levels assumed in the outlook.
Higher energy prices could place renewed pressure on inflation, the external account and overall economic activity.
Climate-related risks are another concern. The report highlighted evolving El Niño conditions and the possibility of floods, which could adversely affect economic performance.
The SBP also warned that delays in implementing structural reforms could weaken exports, slow productivity gains and constrain Pakistan’s ability to sustain higher economic growth without generating inflationary and external account pressures.
SBP highlights monetary policy transmission
The latest MPR also contains six analytical boxes examining important aspects of inflation and monetary policy.
These include an update on the monetary policy transmission mechanism, central bank responses to supply-side inflation, different measures of inflation used globally and by the SBP, and the growing size of open market operations and their implications for monetary policy.
The report also examines the use of sentiment surveys to assess stakeholders’ expectations regarding different aspects of the economy.
Overall, the SBP’s FY27 outlook points to a gradual strengthening of economic activity, easing inflation and a contained external deficit. However, geopolitical tensions, climate-related shocks and delays in structural reforms remain significant risks to Pakistan’s economic recovery and the sustainability of higher growth.