S&P sees cautious monetary policy despite Pakistan’s improving economic outlook

S&P Global Market Intelligence expects Pakistan's monetary policy to remain cautious in the coming months despite improving macroeconomic conditions, warning that persistent inflationary pressures and external uncertainties will likely limit the scope for policy easing.

The assessment followed the State Bank of Pakistan's (SBP) decision on Monday to leave the benchmark policy rate unchanged at 11.5%, with the central bank citing heightened external risks linked to renewed conflict in the Middle East.

Ahmad Mobeen, Principal Economist at S&P Global Market Intelligence, said the central bank's latest decision reflected a more stable economic environment, supported by easing short-term external pressures, stronger activity indicators and improving business sentiment. However, he said policymakers were expected to maintain a prudent stance as inflation remained above the SBP's target range.

According to Mobeen, renewed geopolitical tensions in the Middle East, fluctuations in global commodity prices and the possibility of a severe El Niño weather event continue to pose significant risks to Pakistan's economic outlook. He added that while the country's external buffers were strengthening, substantial debt repayments and continued reliance on official financing and rollover arrangements meant policy discipline would remain essential.

Looking ahead, S&P Global Market Intelligence forecasts Pakistan's real GDP to expand by 3.5% in fiscal year 2027, supported by strengthening economic fundamentals. Nevertheless, it cautioned that commodity price volatility and the potential impact of severe weather associated with El Niño could weigh on growth prospects.

The firm also projects a further improvement in Pakistan's external sector, driven by resilient workers' remittances and planned official financial inflows. It expects the country's foreign exchange reserves to reach $19.5 billion by the end of December 2026.

S&P further forecasts the current account deficit at 0.7% of GDP in calendar year 2026, widening slightly to 0.9% of GDP in calendar year 2027.

Separately, SBP Governor Jameel Ahmad said after the Monetary Policy Committee meeting that proactive macroeconomic management, supported by a prudent monetary policy stance and continued fiscal consolidation, had enabled Pakistan to absorb the ongoing supply shock and preserve macroeconomic stability despite a difficult global environment.