The International Monetary Fund (IMF) has maintained Pakistan's economic growth forecast at 3.5% for the new fiscal year, while cautioning that a potential resurgence of conflict in the Middle East could increase price volatility and disrupt global supply chains. The projection, unchanged from the IMF's previous two reports since April 2026, suggests a marginal slowdown from the estimated 3.7% growth achieved in the prior fiscal year.
Growth Target Falls Short of Job Creation Needs
The Pakistani government has set a growth target of 4% for FY2026-27, which is significantly lower than the 6% rate required to create 4.5 million jobs annually and reduce high poverty and unemployment levels. According to the IMF, Prime Minister Shehbaz Sharif's two terms since 2022 have failed to create enabling conditions for sustained economic acceleration without triggering fiscal and external crises.
Middle East Conflict Risks and Commodity Price Volatility
The IMF's World Economic Outlook (WEO) update coincides with renewed attacks between Iran and the United States, endangering a fragile temporary ceasefire. "The possibility of renewed Middle East conflict looms large and could extend commodity price volatility, further threaten supply chains, raise prices, and weigh on financial conditions," the report states. It adds that trade fragmentation could accelerate, potentially hurting output and increasing prices.
The IMF warned that renewed conflict would propagate through further increases in commodity prices, extended volatility, supply shortages, and exchange rate pressures. It noted that the muted increase in oil prices and their contained impact on activity have been due to the release of inventories, which are now approaching multiyear lows and could reach stress levels if supply disruptions persist or hoarding accelerates.
Following the US withdrawal of Iran's oil export permission and aerial attacks, crude oil prices surged by $8 per barrel within two trading days. Consequently, diesel prices for Pakistani imports have risen by $5 so far, while petrol prices have remained largely stable. This may lead to upward price adjustments on Friday if no corrections occur within two days.
Global Inflation and Growth Projections
The IMF projects global headline inflation will increase from 4.1% in 2025 to 4.7% in 2026 before declining to 3.9% in 2027. These projections indicate that the disinflation trend observed since early 2024 has stalled. Global economic growth is forecast at 3% in 2026 and 3.4% in 2027, down from the average of 3.5% in the last two years. The forecast is broadly unchanged compared with the April 2026 WEO.
The IMF attributes the modest slowdown to the effects of the Middle East war being partly offset by accelerated demand-driven momentum in the global technology cycle, driven by advances in artificial intelligence (AI). However, the impact varies widely based on countries' exposure to the war and their position in the technology value chain. Energy exporters outside the conflict zone benefit from favorable terms of trade, while economies integrated into the technology-led upturn see stronger activity even if they are energy importers.
Regional Outlook for Middle East and Central Asia
In the Middle East and Central Asia, growth is projected to drop sharply to 0.7% in 2026 before rebounding to 6.5% in 2027. This represents a downward revision of 1.2 percentage points for 2026 and an upward revision of 1.9 percentage points for 2027, reflecting a longer closure of the Strait of Hormuz relative to the April WEO assumptions and a corresponding larger rebound. Iraq, Kuwait, and Qatar – commodity producers most affected by disruptions to energy output and transport – are projected to experience sharp contractions in 2026, followed by double-digit expansions in 2027. Saudi Arabia is somewhat less affected, with growth forecasts of 1.7% in 2026 and 5.5% in 2027.
