Pakistan can still achieve 4% growth despite Middle East tensions

State Bank of Pakistan (SBP) Governor Jameel Ahmed said geopolitical conflicts in the Middle East have slowed momentum toward the country's 4% GDP growth target, but the goal remains achievable, supported by growth across key sectors, including services, agriculture and large-scale manufacturing (LSM).

Speaking during an analysts' briefing, Ahmed said concessions provided in the FY27 budget, including lower borrowing costs, improved Export Refinance Facility (ERF) terms and tax relief measures, are expected to provide the necessary economic boost to achieve the target while keeping inflation contained.

The governor provided limited comments on the FY27 budget, noting that a formal assessment would be presented at the next monetary policy meeting.

The Monetary Policy Committee (MPC) noted that the FY27 budget is designed to support industry and provide relief to selected segments of the economy. The committee said it is still assessing the budget's implications for inflation, the external account and other macroeconomic indicators. However, given that the budget has been framed within the ongoing IMF program, the MPC broadly views it as balanced.

Worker remittances reached a record USD 4.25 billion in May 2026, with inflows from the UAE hitting an all-time high of USD 1 billion. Given current geopolitical developments, the SBP expects overseas worker outflows to continue growing, helping remittances remain close to USD 42 billion in FY26.

Pakistan has cleared USD 25.5 billion in debt obligations so far in FY26, with the remaining USD 700 million scheduled for repayment in the final two weeks of the fiscal year. As of June 5, 2026, the country's foreign exchange reserves stood at USD 17.2 billion and remain on track to reach the FY26 target of USD 18 billion, equivalent to about 2.7 months of import cover.

The current account deficit is expected to remain near the lower end of the previously projected range of 0% to 1% of GDP in FY26, as strong worker remittances in May more than offset a wider trade deficit caused by a surge in energy imports in April.

According to provisional Pakistan Bureau of Statistics (PBS) estimates, real GDP growth is expected at 3.7% in FY26, up from 3.2% in FY25. The MPC noted that growth was constrained by the impact of Middle East tensions and ongoing austerity measures.

Growth was led by the services and industrial sectors, with LSM expanding 6.5% during July-March FY26. However, high-frequency indicators suggest economic activity slowed in the fourth quarter as elevated prices and uncertainty weighed on demand.

Looking ahead, spillover effects from regional conflicts and a weaker agriculture outlook could weigh on growth in FY27.

The agriculture sector remains a downside risk, with subdued Kharif crop prospects and below-average rainfall expected to affect output. The governor said these risks have been incorporated into policy assumptions, including the projected monetary policy path, although some adverse impact may still materialize.

In February, banks revised the Export Refinance Facility rate from the policy rate minus 3 percentage points to a fixed rate of 4.5%, effectively providing an additional reduction of about 3 percentage points from the prevailing 7.5% rate. Despite a 100-basis-point increase in the policy rate at the last MPC meeting, banks maintained the ERF rate at 4.5%, absorbing the additional cost to support exporters and preserve export competitiveness.