Middle East war a major threat to Pakistan’s economic recovery

Islamabad: The State Bank of Pakistan (SBP) has said that Pakistan’s economic situation saw significant improvement in the first half of the fiscal year 2025-26; however, the ongoing war in the Middle East could pose serious risks to the country’s economy.

According to the “The State of Pakistan’s Economy” report released by the State Bank, factors such as supply chain disruption due to tensions in the region, rising global oil prices and pressure on remittances could make the future economic scenario uncertain.

The report said that the real GDP growth rate during fiscal year 2026 is likely to remain close to the lower bound of the State Bank’s previously expected target of 3.75 percent to 4.75 percent. According to the State Bank, economic activity continued to improve until February, but the effects of the war increased pressure on industrial production and business activities in the subsequent months.

According to the report, the inflation rate declined and the average National Consumer Price Index (NCPI) during the first half was 5.2 percent, which is about two percentage points lower than the previous year. However, due to the increase in the prices of crude oil and other essential commodities in the global market, inflation is expected to remain above the target of between 5 and 7 percent in FY27.

The State Bank said that prudent fiscal and monetary policy, IMF program, and improvement in foreign exchange reserves played an important role in economic stability.

According to the report, for the first time since FY02, the fiscal deficit turned into a surplus in the first half of the fiscal year, while the economy was supported by improvements in industrial activity and the services sector.

The State Bank warned that Pakistan will have to take long-term measures to address tax reforms, increase exports, investment and climate change for sustainable economic growth.