Pakistan's inflation is expected to gradually ease toward the upper end of the State Bank of Pakistan's 5-7% target range by June 2027, although risks to the outlook have increased significantly, the central bank said on Monday.
What is Pakistan's inflation outlook for 2027?
Headline inflation accelerated to 9.2% year-on-year in July and 11.1% in August, driven mainly by higher food prices, particularly wheat and perishable items. Energy costs also remained elevated amid the Middle East conflict, pushing core inflation up to 8.7%, the State Bank of Pakistan's Monetary Policy Committee said.
"Inflation expectations of consumers and businesses also increased in the latest surveys," the SBP said. The central bank said changes to the high-speed diesel pricing mechanism led to a sharp reduction in diesel prices in August, partly offsetting the impact of higher global energy prices on domestic inflation.
The SBP said a positive real interest rate on a forward-looking basis should help contain demand pressures and limit second-round effects from higher food and energy prices.
Why have inflation risks increased in Pakistan?
While the overall inflation outlook for fiscal 2027 remains broadly unchanged from the previous assessment, the risks to the forecast have increased significantly, the MPC said. The main risks include volatility in global commodity prices, changes in electricity and gas tariffs, supply disruptions and unexpected food-price movements amid worsening El Niño conditions.
The MPC said it remained committed to achieving price stability and would continue to monitor economic data and developments in the Middle East.
How is Pakistan's current account and foreign reserves position?
Pakistan's current account deficit in July was broadly in line with the SBP's expectations, as imports of goods and services grew faster than exports despite strong workers' remittances. The issuance of $3 billion in Eurobonds in September, along with significant foreign-exchange purchases by the central bank, helped raise its foreign-exchange reserves to $21.4 billion, the SBP said.
Resilient remittances and higher information and communications technology exports are expected to keep the current account deficit at 0-1% of GDP during fiscal 2027, the central bank said. Planned financial inflows and continued foreign-exchange purchases by the SBP are expected to cover external financing needs and support reserves, which are projected to approach three months of import cover by June 2027.
The central bank nevertheless warned that the external outlook remained vulnerable to elevated global commodity prices and supply constraints arising from developments in the Middle East.
How did Pakistan's fiscal consolidation perform in fiscal 2026?
Pakistan's fiscal consolidation during fiscal 2026 was stronger than budget targets, helped by contained current expenditure and lower interest payments, the SBP said. Tax collection during the first two months of fiscal 2027 remained broadly in line with Federal Board of Revenue targets, although growth slowed from a year earlier.
The fiscal position also benefited from a higher-than-budgeted transfer of SBP profits to the government. The central bank transferred 1.9 trillion rupees, compared with the budgeted 1.4 trillion rupees.
The MPC said meeting the tax revenue target remained essential and would require sustained efforts amid an uncertain domestic and global environment. It also called for faster fiscal reforms, particularly measures to broaden the tax base and reduce losses at state-owned enterprises, to support stronger and more sustainable economic growth.
How fast is private-sector credit growing in Pakistan?
Broad money growth slowed to 11.6% year-on-year as of August 28 from 13.2% at the time of the previous MPC meeting, reflecting lower contributions from both net domestic assets and net foreign assets of the banking system. Private-sector credit, however, grew 13.4% year-on-year, supported by lower net government borrowing from the banking system and a recovery in economic activity.
Growth in private-sector borrowing was broad-based across working capital, fixed investment and consumer financing, with wholesale and retail trade, agriculture and sugar among the major borrowing sectors. The SBP expects private-sector credit growth to strengthen further as economic activity recovers.
What are the risks to Pakistan's growth outlook?
The MPC also highlighted Moody's upgrade of Pakistan's sovereign credit rating to B3 with a stable outlook and the country's successful $3 billion Eurobond issuance since its previous meeting. Large-scale manufacturing output fell 3.5% in June, although cumulative growth during fiscal 2026 reached 5%, the committee said.
Meanwhile, inflation expectations among businesses and consumers increased in September, while confidence weakened. The MPC said adverse geopolitical developments and weather-related disruptions had become more frequent and continued to pose risks to Pakistan's macroeconomic outlook.
A prudent monetary and fiscal policy mix and further buildup of economic buffers would be needed to absorb supply shocks, the SBP said, adding that timely structural reforms would be critical to improving resilience, raising productivity and supporting higher and sustainable economic growth.
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