Middle East war could push Pakistan inflation to 11% and slow growth, Topline warns

Pakistan's inflation could average 9-11% over the next 12 months if the Middle East conflict drags on, according to a new report by Topline Securities. Higher oil prices are the main driver, with fourth-quarter FY26 inflation potentially exceeding 11% under a $100 per barrel oil price assumption. Growth forecasts have also been revised downward.

What does Pakistan's inflation forecast look like if the Middle East war continues?

Pakistan's inflation is projected to average 9-10% over the next 12 months, rising above 11% in the fourth quarter of FY26, based on oil at $100 per barrel.

If oil climbs to $120 per barrel, average inflation could reach 10-11%, which may require the State Bank to tighten monetary policy further to protect real interest rates.

"Every $10 per barrel increase has an impact of 50 basis points on our inflation projections," said Shankar Talerja, head of research at Topline Securities.

How could higher oil prices affect Pakistan's GDP growth?

Higher energy prices are expected to weigh on economic growth alongside inflation.

Topline revised its GDP growth forecast for FY27 to 2.5-3.0%, down from an earlier estimate of 4.0%, a reduction of 100-120 basis points. For FY26, growth is expected to remain within the range of 3.5-4.0%, broadly in line with revised central bank guidance.

What pressure could the conflict put on Pakistan's external accounts?

The current account deficit for FY27 could stay below $3.5 billion, or 0.8% of GDP, if administrative controls on imports are maintained. Without those controls, the deficit could exceed $8 billion, or 1.9% of GDP, putting direct pressure on foreign exchange reserves.

The fiscal deficit for FY26 is expected to land between 4.0% and 4.5%, slightly above the IMF's 4.0% target, partly due to government relief spending. A similar range is projected for FY27.

The Pakistani rupee is expected to depreciate by an average of 5-6% in FY27 under a controlled scenario. Slippages in external balances could, however, lead to sharper depreciation.

How are Pakistan's imports, exports and remittances expected to change?

Non-oil imports are projected to reach $48-50 billion in FY26, the second-highest level on record.

Topline notes that non-oil imports have declined only five times in the past 22 years, mainly during periods of strict government controls or global financial stress. In its base case, Topline expects non-oil imports to fall 8% in FY27, against a long-term compound annual growth rate of 5.7%, supported by administrative measures.

Oil imports are expected to decline because of a projected 12% drop in petroleum consumption. That decline is offset by an assumed 48% increase in crude and refined petroleum prices, with crude at $100 per barrel and refined products at $130 per barrel.

Remittances are projected to fall 3.5% in FY27, reflecting a 10% decline from Gulf countries and a 3% rise from the rest of the world.

Exports are expected to decline 4% in FY27, based on historical trends during comparable periods.

Under these combined assumptions, the current account deficit is projected at $3.5 billion, or 0.8% of GDP, for FY27.