With the fallout of the Middle East conflict clouding the economic outlook, the SBP raised its benchmark policy rate by 100 basis points (bps) to 11.5 per cent on Monday. While most analysts had expected the central bank to keep rates unchanged at 10.5 per cent, with some even cautioning against any easing given a worsening inflation picture, others foresaw an increase. In its statement, the Monetary Policy Committee (MPC) noted that the prolonging of the Middle East conflict had intensified risks to the macroeconomic outlook, with global energy prices, freight charges and insurance premiums still significantly above pre-conflict levels. Pakistan has been among the hardest hit by the fallout, with people having to endure painful fuel hikes, gas and power disruptions, temporary school closures, and early closing hours for markets. While March inflation came in at just 0.3 per cent above the MPC’s target range of 5.0-7.0 per cent and incoming data has been broadly in line with its expectations so far, the committee says that the impact of global developments will be visible in key economic indicators going forward and inflation is likely to increase and remain above the target range in the next few quarters. Already, the surge in fuel prices has begun to make its mark on the core inflation rate via transport fares, though the MPC says food inflation remains contained amidst ample supplies, which has inched up to 7.8 per cent. In this context, raising rates appears prudent.
However, while the raising of rates might help when it comes to price stability and preventing a bad situation from getting worse, things are already as bad as they can be for too many Pakistanis. The latest blow came last Friday, when the government hiked the price of petrol and diesel by Rs26.77 per litre. And the worst could still be yet to come. With summer usually a financially painful month for anyone who has to pay their electricity bill, the next few months could be quite painful indeed if the energy situation remains precarious. Even prior to the Middle East conflict, inflation was edging upwards and most people were struggling with higher bills, tariffs and the cost of living in general. It also does not help that growth has been largely tepid in recent years. While the growth rate in the second quarter of the current fiscal, provisionally recorded at 3.9 per cent, an improvement when compared to the same period last year, the expected spillover of the ongoing Middle East conflict on industrial and services sector activity in the fourth quarter, is expected to result in real GDP growth for FY26 turning out closer to the lower bound of the MPC’s projected range.
The picture only grows more ominous, with the IMF reportedly setting 11 new conditions for Pakistan to secure its next $1.2 billion tranche and indications that the government will have to adjust electricity and gas in FY2026-27. The IMF has been a tough friend even without a global energy crisis, but now with one roiling the world, its conditions may become even harder to live with. What this whole situation underlines is that one needs to build a robust, independent economy when times are good so that coping with bad times is easier. While the government has secured economic stability, the fact that revenue collections are still below target and SOEs, the power sector and agricultural taxation still need reforms shows that much more could have been done over the past few years to put Pakistan in a better position.
