Business Recorder
EDITORIAL: The State Bank of Pakistan’s latest Financial Stability Review projects resilience across Pakistan’s financial system, pointing to stronger reserves, improved capital buffers and a calmer macroeconomic environment during CY25. Yet even within the same assessment, the central bank acknowledges that the conflict in the Middle East, rising oil prices and geopolitical uncertainty pose serious risks to inflation, growth and external stability. That contradiction deserves closer scrutiny because the economic environment now confronting households and businesses looks far more fragile than the broader tone of reassurance suggests. There is no question about the fact that some indicators improved during the last calendar year. Inflation had eased into the target range for a period, reserves recovered, and the banking sector remained solvent and profitable. The completion of IMF reviews and arrangements under the Extended Fund Facility and Resilience and Sustainability Facility also helped reinforce confidence. Those gains are real. The difficulty lies in treating those gains as though they define the current trajectory. Conditions have shifted rapidly. Oil prices have risen sharply because of instability in the Middle East, the petrol and diesel price hikes are already feeding through the economy and the State Bank itself has warned that inflationary pressures are expected to intensify. Monetary tightening has resumed because policymakers clearly recognise that inflation expectations are turning upward again. That shift matters is a fact because Pakistan’s inflation history is still fresh in public memory. Households and businesses have only recently emerged from one of the most severe inflationary episodes in decades. A renewed cycle of fuel-driven price increases risks reopening the same pressures on transport, food, manufacturing and borrowing costs. Once inflation expectations become embedded, reversing them becomes significantly harder. The wider economic environment also complicates the optimistic framing. Electricity shortages and load-shedding continue to disrupt industrial output and household consumption. Energy costs remain elevated, placing pressure on both production and disposable incomes. Businesses already dealing with high financing costs now face additional uncertainty regarding power availability and input prices. Food inflation also remains vulnerable. Even where current supplies are relatively stable, higher transport and energy costs eventually pass through to retail prices. This is particularly important in a country where food carries a substantial weight in household expenditure. A rise in fuel costs rarely remains confined to fuel alone. Fiscal pressures add another layer of concern. Revenue collection targets have become increasingly difficult to meet as growth slows, and economic activity remains uneven. The state’s reliance on indirect taxation and petroleum levies to shore up revenues further amplifies inflationary pressures at a time when consumer purchasing power is already under strain. Against this backdrop, the central bank’s communication strategy matters. Financial stability reports are not expected to project alarm, but they are expected to present a balanced picture of risks alongside strengths. Overemphasising resilience while underplaying near-term vulnerabilities risks creating a disconnect between official messaging and lived economic reality. The issue is not whether Pakistan’s banking sector can withstand stress. By most conventional indicators, capital adequacy and provisioning levels remain strong. The issue is whether macroeconomic conditions are moving in a direction consistent with sustained stability. On that front, the warning signs are becoming harder to ignore. SBP itself acknowledges that a prolonged Middle East conflict could keep oil prices elevated, strain the external account and weaken growth momentum. Independent experts surveyed by the bank identified geopolitical risk as the single greatest threat to financial stability over the coming months. Those concerns deserve to feature more centrally in the broader economic narrative. Markets and businesses do not benefit from selective optimism. They benefit from clarity. Policymakers gain credibility when they openly acknowledge the scale of the challenge while explaining how they intend to manage it. That is particularly important in an economy as sensitive to external shocks as Pakistan’s. The gains achieved over the last year should not be dismissed. But preserving them will require realism about the risks ahead. Stability is not maintained through reassuring language alone. It depends on recognising emerging pressures early, responding coherently and communicating honestly about the path forward. Copyright Business Recorder, 2026
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