KARACHI: Surging oil prices worldwide and their impact on other commodities are expected to keep inflation above the medium-term target of five to seven percent for most of the fiscal year 2027, Pakistan’s central bank said in a report on Tuesday.
The State Bank of Pakistan (SBP) made these disclosures in its Half Year Report 2025-2026. The US-Israel war against Iran, which was triggered in February, has pushed global oil prices higher as Tehran has responded with attacks against energy and civilian infrastructure in Gulf states.
Iran has also shut down the Strait of Hormuz, a strategic waterway accounting for roughly 20 percent of the world’s oil and gas shipments. As a result, Pakistan’s government has increased petrol prices from Rs285 ($1.02) per liter to Rs414.78 ($1.49), an increase of approximately 45 percent per liter.
“A surge in international oil prices and its impact on other commodity prices are expected to keep the NCPI inflation above the upper bound of the medium-term target range of 5 to 7 percent for most of FY27,” the SBP said in its report.
The report said large scale manufacturing, construction and other economic activity maintained momentum throughout February 2026 before the war began. Therefore, the SBP said it projects real GDP growth close to the lower bound of its earlier projected range of 3.75 to 4.75 percent for FY26.
“Despite momentum in economic activity and higher commodity prices, the current account deficit is now expected to be close to the lower bound of the earlier projected range of 0 to 1 percent of GDP,” it added.
The report said exports declined during the first six months of the ongoing fiscal year, despite an increase in global trade. It said the decline was led by significantly lower rice exports, while export of high value-added textiles remained relatively resilient.
It said exports are expected to remain “weak” due to the possibility of slower global economic growth; multi-year low rice prices; closure of Pakistan’s western border with Afghanistan; and realignment of global trade flows due to ongoing tariff.
“Workers’ remittances may also be impacted in Q4-FY26, considering that remittances from the GCC countries contributed around 55 percent of total remittances between FY21-FY25,” the report added.
The SBP said it forecasts fiscal deficit in the 3.5 to 4.5 percent of the GDP range during FY26. It added that while the near-term outlook remains broadly stable, “lingering impacts of war” on supply chain resumption and global economic activity could pose significant challenges to Pakistan’s macroeconomic stability over the medium-term.
These challenges could include slower economic activity amid the prevailing uncertainty in Gulf economies, that the report said could impact remittance inflows. It said supply chain disruptions, especially the import of critical raw materials and machinery, could affect industrial production as well as exports.
“Third, the slowdown in economic activity is likely to have implications for revenue generation,” the report said.
The oil price surge has severely impacted Pakistan, which is a country heavily dependent on fuel that it imports from the Middle East. These international shocks are compounded by the stringent conditions of a $7 billion International Monetary Fund bailout.
To meet the lender’s requirements, the government has been forced to eliminate fuel subsidies and increase the petroleum development levy to its maximum ceiling.
