By Moaaz Manzoor

The State Bank of Pakistan has warned that the ongoing conflict in the Middle East poses significant risks to Pakistan’s economic outlook through higher oil prices, supply-chain disruptions, inflationary pressures and uncertainty in remittance flows, according to the central bank’s Half Year Report 2025-26.

The report said Pakistan’s macroeconomic conditions improved considerably during the first half of FY26, but the outbreak of war in the Middle East since February 2026 has created fresh external vulnerabilities for the economy.

According to the SBP, the surge in international oil prices following the conflict has already prompted the government to introduce austerity and energy-conservation measures aimed at preserving macroeconomic stability.

The central bank warned that prolonged geopolitical tensions could significantly affect inflation, trade, industrial activity and fiscal performance in Pakistan.

The report noted that higher global oil prices have started feeding into domestic inflation despite initial government efforts to absorb part of the increase through fiscal adjustments.

Energy inflation, which had declined sharply during H1-FY26 because of lower international commodity prices, is now expected to rise during the second half of the fiscal year.

The SBP said oil-price shocks could also create second-round inflationary effects through higher transportation costs, industrial input prices and inflation expectations.

As a result, the central bank projected that inflation is likely to remain above the upper bound of the medium-term target range of 5 to 7 percent during the remaining months of FY26 and into FY27.

The report also warned that rising freight charges, insurance premiums and shipping disruptions linked to the conflict could increase Pakistan’s import costs.

These pressures may widen the trade deficit further at a time when exports are already weakening because of lower rice prices, shifting global trade patterns and border-related disruptions.

During H1-FY26, imports increased 12.4 percent while exports declined 5 percent, widening the trade deficit by nearly 36 percent.

The SBP warned that supply-chain disruptions involving machinery, fertilizer and industrial raw materials could also affect domestic production and exports in coming quarters.

Agriculture may face additional pressure if fertilizer shortages emerge because of disruptions in global energy and commodity markets.

The report said remittance inflows could also become vulnerable if economic activity slows in Gulf economies.

Pakistan remains heavily dependent on the GCC region for overseas income flows, with Gulf countries contributing around 55 percent of total remittances received between FY21 and FY25.

Any weakening in labour-market conditions across the Gulf could affect remittance inflows, which remain one of the largest sources of foreign exchange for Pakistan.

Despite these risks, the SBP said Pakistan entered the crisis period with a far stronger macroeconomic position than in previous years.

Real GDP growth reached 3.8 percent during H1-FY26 compared with 1.9 percent a year earlier, while inflation declined to 5.2 percent from 7.2 percent in the same period last year.

The country’s foreign exchange reserves also increased to $16.1 billion by December 2025 compared with $14.5 billion at the end of FY25.

The report said these improvements strengthened Pakistan’s ability to absorb external shocks compared with earlier periods of economic stress.

However, the central bank acknowledged that prolonged geopolitical instability could still create serious challenges for macroeconomic management.

The SBP projected GDP growth for FY26 within the range of 3.75 percent to 4.75 percent despite emerging external risks. The current account deficit is expected to remain between 0 and 1 percent of GDP.

Economists say Pakistan’s vulnerability to external shocks remains high because the economy depends heavily on imported energy, remittances and external financing.

The report stressed that maintaining macroeconomic stability under increasingly uncertain global conditions will require continued policy discipline, reserve accumulation and structural reforms aimed at strengthening exports and improving energy efficiency.

Credit: INP-WealthPk