SBP warns floods may weigh on growth

KARACHI: Pakistan’s central bank said on Thursday that the country’s macroeconomic conditions were stable at the start of fiscal year 2026, but it warned that flood-induced damages to agriculture and infrastructure pose risks to the overall economic outlook.

The losses caused by the flood are expected to pose upside risks to the projections for both twin deficits and the inflation outlook, while presenting downside risks for growth. Additionally, geopolitical tensions and trade uncertainties may affect the external outlook by increasing volatility in global commodity prices and slowing down global growth and trade flows, according to the SBP.

In its annual report on the economy for fiscal year 2024-25, the State Bank of Pakistan (SBP) said that recent floods could disrupt crops and supply chains. Despite this, the lagged impacts of a significant reduction in interest rates are expected to support economic activity. The SBP adhered to its forecast for real GDP growth, predicting it will remain close to the lower end of the 3.25-4.25 per cent range during this fiscal year. This projection was also made during last month’s monetary policy meeting.

This month, the government lifted its growth estimate for the last fiscal year, indicating that the economy grew at 3.04 per cent compared with an earlier estimate of 2.7 per cent.In the World Economic Outlook released this week, the IMF projected Pakistan’s economic growth rate at 3.6 per cent for FY26.

The SBP’s report was released a couple of days after the International Monetary Fund (IMF) reached a staff-level agreement with Pakistan on its loan programme, which would allow the country to access $1.2 billion following approval from the Fund’s board.

According to the SBP report, moderate expansion in economic activity and flood-related shortages of agricultural commodities may lead to an increase in imports. Conversely, the slowdown in global demand and damage to agricultural production are expected to keep exports contained.

“However, lower US tariffs on Pakistan’s exports relative to the competitors may partly offset the fallout of floods and adverse global developments. Further, the workers’ remittances are maintaining the momentum and likely to partly offset the deterioration in trade deficit,” the report said. The SBP projects the current account deficit in the range of zero to 1.0 per cent of GDP in

FY26. The central bank anticipates that food and energy inflation may rise due to the gradual phasing out of favourable base effects. These factors could cause inflation to exceed the upper bound of the medium-term target range of 5-7 per cent in the second half of FY26. However, it said continued restrained domestic demand, combined with a stable outlook for global commodity prices, is expected to keep underlying inflation in check. This should help guide inflation back into the medium-term target range in FY27.

The IMF, in its latest statement, said that to keep inflation within the medium-term target range, Pakistan will maintain a data-dependent and tight monetary policy. The global lender noted that floods may temporarily affect prices. Additionally, the IMF mentioned that the SBP is prepared to adjust its policy stance if price pressures intensify or if inflation expectations become unanchored.

The SBP has cut rates by 1,100 basis points (bps) to 11 per cent between June 2024 and May 2025. It kept them steady in June, July and September. Committee to reduce the policy rate by a cumulative 1,100bps between June 2024 and June 2025.

Low savings rate hinders Pakistan’s growth potential The SBP highlighted in its report that various structural issues have weakened the country’s growth potential. One significant factor is the low savings rate, which has hindered both private and public investment.

According to the SBP, several factors contribute to low savings in Pakistan, including low per capita income, a high inflation rate, a large fiscal imbalance, an extensive informal economy, and a high youth dependency ratio. Moreover, cultural and behavioural constraints have further undermined savings. The persistently large fiscal deficit in recent years has limited both public and private savings and investments. The government's ongoing reliance on banks for deficit financing has created a strong sovereign-bank nexus that often crowds out private sector credit. Beyond these long-standing issues, the increasing frequency of climate events has disrupted productive activities and heightened stress on fiscal and external accounts. Furthermore, persistent political and economic instability, high tax rates, complex tax rules and regulations, logistical bottlenecks, cumbersome regulations, and a challenging law and order situation have negatively impacted the investment climate in the country over time.