Impact of Floods on Pakistan’s Macroeconomic Outlook
The State Bank of Pakistan (SBP) has highlighted that the damage caused by recent floods to agriculture and infrastructure poses significant risks to the country’s macroeconomic outlook. The report states that while Pakistan’s macroeconomic conditions were broadly stable at the beginning of FY26, the situation is now under scrutiny due to the devastating effects of the floods.
During the period from April to August 2025, three major international credit rating agencies upgraded Pakistan’s credit rating, which was attributed to the stability of the external account, continued fiscal consolidation, and the implementation of reforms under the IMF’s Extended Fund Facility (EFF) program. However, the flood-induced damages have raised concerns about the overall economic trajectory.
The floods have submerged large areas in two provinces—Khyber Pakhtunkhwa (KP) and Punjab—leading to extensive loss of life, agricultural produce, and infrastructure. The kharif crops such as rice, cotton, maize, and sugarcane have been severely affected. While the post-flood soil enrichment may help improve yields for Rabi crops, the overall agricultural output could still be significantly impacted. Additionally, disruptions in supply chains, weakened domestic demand, and reduced availability of raw materials for agro-based industries are expected consequences.
Despite these challenges, the lagged impact of a significant reduction in the policy rate is anticipated to sustain momentum in economic activity. High-frequency indicators, including sales of automobiles, cement, and POL products, along with increased import volumes in July and August of FY26, support this view. Moreover, planned increases in development spending and post-flood reconstruction efforts are likely to boost construction activity during FY26.
Economic Projections and Fiscal Outlook
Incorporating these developments, the SBP projects real GDP growth to remain close to the lower end of the previously projected range of 3.25% to 4.25% during FY26. The flood-induced losses to infrastructure have increased the need for rehabilitation and reconstruction, but continued fiscal consolidation measures, including efforts to control energy sector circular debt and targeted power subsidies, are expected to keep spending growth in check.
On the revenue side, ongoing tax reforms and efforts to increase economic documentation are expected to strengthen tax collection. This, combined with substantial transfers of SBP profits in August 2025, is projected to bolster overall revenue growth. As a result, the fiscal deficit is expected to fall within the range of 3.8% to 4.8% of GDP in FY26.
Trade and Inflation Outlook
The expansion in economic activity and expected shortages of agricultural commodities may lead to an increase in imports during FY26. However, the slowdown in global demand and damages to agriculture produce are expected to weigh on exports. Lower US tariffs on Pakistan’s exports compared to competitors may partially offset the fallout from the floods and adverse global developments. Workers’ remittances are also maintaining momentum and may help offset the deterioration in the trade deficit.
Incorporating these trends, the SBP projects the current account deficit (CAD) to remain within the range of 0% to 1.0% of GDP in FY26. Flood-induced shortages of perishable food commodities may exert upward pressure on food prices. Additionally, food and energy inflation is likely to rise due to the phasing out of favorable base effects. With the steep increase in gas prices in July 2025 and the expiry of electricity price relief in Q4-FY25, energy prices are expected to trend upwards in FY26.
However, restrained domestic demand, a benign global commodity price outlook, and a stable external outlook are expected to keep underlying inflationary pressures in check. Accounting for these trends, the headline NCPI inflation may cross the upper bound of the medium-term target range of 5.0% to 7.0% in the second half of FY26 before reverting to the target range in FY27.
Structural Challenges and Policy Efforts
The report notes that various structural issues have led to a weakening growth potential in Pakistan, including a low savings rate that has inhibited both private and public investment. A special chapter titled “The Challenge of Low Savings in Pakistan” highlights factors such as low per capita income, high inflation, large fiscal imbalances, a large informal economy, and cultural and behavioral constraints that have undermined savings.
Moreover, the government’s continued reliance on banks for deficit financing has created a strong sovereign-bank nexus, often crowding out private sector credit. The rising frequency of climate events has not only disrupted productive activities but also increased stress on fiscal and external accounts. Political and economic instability, high tax rates, complex regulations, logistic bottlenecks, and a challenging law and order situation have affected the investment climate over time.
The report emphasizes that concerted policy efforts and reforms are necessary to address these structural issues and place the country on a sustainable high-growth trajectory.
