Pakistan raises FY26 inflation outlook to 7.5% amid Gulf war, GDP growth seen at 4.2%

Pakistan and the International Monetary Fund have revised the inflation outlook upward for the current fiscal year, with CPI-based inflation now projected at 7.5 percent for 2025-26 amid rising global pressures linked to the Gulf conflict.

The updated estimate is higher than the earlier projection of around 6.1 percent by the Ministry of Finance. Officials said inflationary pressures have increased due to disruptions in global fuel supply chains following the conflict in the region.

The current account deficit is projected at 0.5 percent of GDP, equivalent to around $2 billion for FY26. Earlier internal projections had placed the deficit at up to $2.8 billion, but authorities indicated it would be contained at $2 billion by the end of June 2026.

Pakistan is also set to repay $1.3 billion in early April 2026 on the maturity of a Eurobond. The government has not yet been able to raise funds through international bond markets, including Eurobond, Sukuk, or Panda bond issuances, during the current fiscal year.

The country’s economic size is projected to reach Rs126.9 trillion by June 2026 and expand to Rs141.66 trillion in FY27. GDP growth is estimated at 4.2 percent for FY26, with a further increase to 5.1 percent expected in the next fiscal year, while inflation is projected to ease to 6.5 percent in FY27.

During the first quarter of FY26, GDP grew 3.71 percent, up from 1.56 percent in the same period last year. Growth was driven by agriculture, which expanded by 2.9 percent; industry, by 9.4 percent; and services, by 2.4 percent.

Economic activity is expected to strengthen in subsequent quarters, supported by easing monetary policy and improved credit flows to the private sector. Public sector development spending increased by 21 percent in the first half of the fiscal year, while company registrations rose by 29 percent and imports of agricultural machinery increased by 27.3 percent during July–November.

Large-scale manufacturing recorded growth of 5.02 percent during July–October FY26, with expansion across sectors including textiles, food, automobiles, petroleum products, and electrical equipment.

The services sector is projected to benefit from growth in trade, transport, finance, digital services, and ICT exports. In agriculture, output of key crops such as rice, maize, and sugarcane has increased, while wheat is expected to meet targets. Livestock grew by 6.3 percent in the first quarter.

Officials said inflation could moderate in the next fiscal year if global conditions stabilise and fuel supply chains normalise. The State Bank is expected to maintain a cautious approach to manage inflation pressures over the medium term.