SBP sees moderate growth, controlled deficit but rising inflation risks in FY26

Pakistan’s economy is expected to experience a mixed trajectory in fiscal year 2025-26, with economic activity gaining momentum despite headwinds from flood damages, rising inflationary pressures, and global uncertainty, according to the State Bank of Pakistan’s (SBP) annual report.

The central bank projects the country’s current account deficit (CAD) to remain contained within a range of 0 to 1.0% of GDP for FY26. This forecast comes amid expectations of increased imports due to economic expansion and agricultural commodity shortages, while exports may slow down due to weak global demand and flood-related disruptions to agriculture.

However, lower U.S. tariffs on Pakistani exports relative to competitors, along with steady workers’ remittances, are expected to partially cushion the impact on the external balance.

The report also warns of upward pressure on food and energy prices in the aftermath of widespread flooding in Khyber Pakhtunkhwa and Punjab provinces. The disaster submerged large agricultural areas, particularly those cultivating key kharif crops such as rice, cotton, maize, and sugarcane.

“The flood-induced shortages of perishable food commodities may also exert upward pressure on food prices,” the report noted, adding that recent hikes in gas prices and the expiry of electricity subsidies are expected to further push energy prices upward.

Despite these challenges, underlying inflationary pressures are expected to remain contained due to stable global commodity prices and restrained domestic demand. Nevertheless, headline National Consumer Price Index (NCPI) inflation is projected to exceed the SBP’s medium-term target range of 5.0 to 7.0% in the second half of FY26 before easing back within the range in FY27.

SBP cited several risks to the outlook, including the lingering impact of floods, geopolitical tensions, and volatility in global trade flows.

Economic activity in early FY26 has shown signs of revival, driven by post-flood reconstruction efforts, increased development spending, and the lagged effects of interest rate cuts. The central bank highlighted improvements in high-frequency indicators, including increased sales of automobiles, cement, and petroleum products, as well as higher import volumes during July and August.

Real GDP growth for FY26 is now expected to be at the lower end of the previously projected range of 3.25 to 4.25%.

On the fiscal front, the government continues to pursue consolidation efforts under the International Monetary Fund’s Extended Fund Facility (EFF). Ongoing tax reforms and greater documentation of the economy are anticipated to strengthen revenue collection. Additionally, large SBP profit transfers in August are expected to bolster revenue performance.

“Fiscal deficit is projected to fall within the range of 3.8 to 4.8% of GDP in FY26,” the report stated, noting that improved tax revenues, containment of circular debt, and moderation in debt servicing costs are key factors supporting this forecast.

The SBP also reported a boost in investor and consumer confidence during the early months of FY26, supported by macroeconomic stability and a cautious monetary policy stance. Between April and August this year, Pakistan’s credit rating was upgraded by all three major international rating agencies, reflecting improved fiscal management and progress on structural reforms.

Still, the central bank cautioned that the full impact of the recent floods on agriculture, infrastructure, and supply chains may present downside risks to growth and upside risks to inflation and fiscal balance.

“The floods have weakened domestic demand, disrupted supply chains, and may reduce the availability of raw materials for agro-based industries,” the report noted.

As reconstruction efforts continue, the SBP emphasized the importance of policy continuity and resilience in managing emerging risks and sustaining the path toward macroeconomic stability.