SBP Warns Middle East Crisis May Hit Pakistan Economy

The State Bank of Pakistan has warned that continuing instability in the Middle East could create fresh risks for Pakistan’s financial system, even as the country’s banking sector remains strong enough to absorb major shocks. The warning came through the central bank’s Financial Stability Review for 2025, released at a time when regional conflict, oil market uncertainty and supply-chain concerns are being closely watched by policymakers in Islamabad and Karachi.

According to the SBP, Pakistan has recently achieved a more stable macroeconomic position, but the external environment remains unpredictable. The central bank said a prolonged or wider Middle East conflict could keep international oil prices elevated, disrupt global trade flows and increase pressure on Pakistan’s already sensitive external account.

The report noted that inflationary pressures could return if fuel costs remain high for an extended period. Since Pakistan depends heavily on imported energy, any surge in oil prices usually filters into transport costs, electricity generation, industrial production and household expenses, making geopolitical instability a direct concern for ordinary citizens as well as financial institutions.

The central bank also referred to its Systemic Risk Survey conducted in January 2026, which showed that independent experts viewed geopolitical risk as the most important threat in the near term. SBP said such risks could spill over into Pakistan’s banking and financial sector if external shocks affect growth, investor confidence or the country’s balance of payments.

Despite these concerns, the SBP maintained that Pakistan’s banking industry remains resilient. It said banks are supported by strong capital buffers, tested supervisory systems and crisis-management frameworks that have helped the sector navigate earlier periods of economic pressure, currency volatility and global uncertainty.

The Financial Stability Review showed that Pakistan’s financial sector expanded by 15.1 percent in 2025, while financial depth improved as assets-to-GDP rose to 67.1 percent. The report said risks to financial stability generally eased during the year, supported by better macroeconomic conditions and a gradual improvement in several banking indicators.

The banking sector’s balance sheets grew by 17.8 percent, largely because of investment in government securities. Advances declined on a year-on-year basis due to the higher base created by last year’s advance-to-deposit ratio linked tax policy, but SBP said lending showed reasonable growth after adjusting for that impact.

The review also highlighted improvement in asset quality. Non-performing loans as a share of gross loans declined to 6.1 percent by December 2025 from 6.3 percent a year earlier, while provisioning coverage improved to 107.7 percent. This means banks have set aside sufficient buffers against bad loans, reducing immediate credit risk in the system.

For Pakistan, the SBP’s warning is important because regional conflict can quickly affect fuel prices, import bills, inflation expectations and exchange-rate stability. A renewed oil shock would complicate budget planning, increase costs for businesses and households, and potentially slow the economic recovery that authorities are trying to protect.

The next challenge for policymakers will be to preserve financial stability while preparing for external shocks beyond Pakistan’s control. The SBP’s report suggests that banks are in a stronger position than in previous years, but the wider economy will remain exposed if Middle East tensions continue to disturb energy markets and global supply routes.