SBP Warns Middle East War Could Hit Pakistan Economy

The State Bank of Pakistan has warned that the continuing Middle East conflict could create fresh pressure on Pakistan’s economy, even as the country showed signs of improved stability during the first half of the current fiscal year. The assessment was issued in the central bank’s half-year review of the economy released on Wednesday.

According to the report, Pakistan entered the second half of FY26 with stronger macroeconomic indicators, including lower inflation, improved external buffers and better fiscal performance. However, the SBP cautioned that rising geopolitical uncertainty could disturb supply chains, lift commodity prices and affect overall economic activity.

The central bank said economic momentum improved in the first half of the fiscal year, supported by industrial recovery, services growth and better policy discipline. It noted that real GDP growth during H1-FY26 was stronger than the same period last year, while imports increased mainly because of higher activity in the economy.

In its assessment, the SBP said prudent monetary and fiscal policies, structural reforms, favourable commodity prices and the IMF programme helped strengthen confidence. The bank maintained that an adequately positive real interest rate and fiscal consolidation played a key role in protecting economic stability.

The report also highlighted a rare fiscal improvement, saying Pakistan posted a fiscal surplus in the first half of FY26 for the first time since FY02. Lower interest payments and tighter spending management helped support the surplus, while the primary balance remained broadly aligned with the previous year’s level.

Despite these gains, the SBP warned that the road to sustainable high growth remains difficult. It identified low savings, weak investment, poor competitiveness, falling exports, limited foreign direct investment and a low tax-to-GDP ratio as long-standing structural challenges that continue to restrict Pakistan’s economic potential.

The central bank also devoted attention to climate risk, saying Pakistan remains among the countries most vulnerable to climate shocks despite contributing only a small share to global emissions. It said climate adaptation and mitigation require major investment, but financing gaps remain significant for both the public and private sectors.

For ordinary Pakistanis, the warning matters because regional instability can quickly translate into higher fuel costs, more expensive imports and renewed inflationary pressure. Businesses may also face uncertainty if shipping routes, remittance flows or global commodity markets are disrupted for an extended period.

Looking ahead, the SBP expects growth to remain near the lower end of its earlier forecast range, while inflation may stay above the medium-term target if global oil and commodity prices continue rising. The next few months will be crucial for policymakers as they balance recovery, reform commitments and external risks linked to the Middle East crisis.