Pakistan's economy is coming under mounting pressure as inflation continues to accelerate, with economists warning that the country risks slipping further into a cycle of weak growth, rising prices and increasing financial strain.
Pakistan's annual inflation rate reached 11.7% in May 2026, after rising to 10.9% in April from 7.3% in March, placing it well above the State Bank of Pakistan's target range of 5% to 7%.
According to economists, the double-digit inflation has been driven by a sharp increase of around 15% in transport costs and perishable food prices. They say the country is also grappling with a severe foreign exchange crisis, a soaring oil import bill and high interest rates, all of which have eroded purchasing power and weighed heavily on economic activity.
Analysts note that while supply chain disruptions have affected economies worldwide, Pakistan is particularly vulnerable to external shocks because of its heavy dependence on imported energy and its fragile balance-of-payments position.
Experts argue that rising inflation is having a cascading effect on the economy. Beyond increasing the cost of daily essentials, efforts by the State Bank of Pakistan to contain inflation through higher interest rates have raised borrowing costs and discouraged business activity by making credit more expensive and increasing production costs.
The central bank recently raised its policy rate by 100 basis points, increasing it from 10.50% to 11.50%. However, several economists have criticised the move, describing it as "the wrong medicine for the wrong diagnosis."
According to these experts, higher interest rates can help cool an economy when inflation is driven by excessive demand. In Pakistan's case, however, they argue that inflation stems from supply-side distortions, meaning that tighter monetary policy is more likely to slow business activity and push the country towards stagflation.
Economists also point to growing pressures on the private sector. They say excessive government borrowing has crowded out private investment, while public spending has largely been directed towards debt servicing rather than development projects, job creation or public welfare.
On the supply side, analysts argue that an implicit preference for lending to the state over the private sector has emerged, as low confidence and uncertainty encourage commercial banks to invest in government securities rather than extend credit to businesses.
Although the State Bank of Pakistan has introduced concessional financing schemes, economists say weak confidence in the economy continues to discourage the private sector from taking risks. As a result, credit to businesses remains limited, while import and foreign exchange restrictions further reinforce stagflationary pressures.
Under normal circumstances, inflation could trigger currency depreciation and support exports. However, analysts say Pakistan's current crisis is primarily a supply shock, with the sharp decline in oil supplies driving up prices and making production and distribution activities increasingly difficult.
The resulting supply chain disruptions have pushed up transportation and food costs and further increased the vulnerability of citizens already struggling with poverty.
Economists describe Pakistan's growth pattern as resembling a pendulum, with periods of limited progress followed by a return to a low-growth trap. Prime Minister Shehbaz Sharif recently said the country's oil import bill had surged from $300 million before the conflict to $800 million, "erasing all the economic progress the country had made over the past two years."
While several economies, including India and Thailand, have shown resilience despite the oil crisis, analysts say Pakistan's difficulties are rooted not only in the current Middle East crisis but also in years of economic mismanagement, prolonged inflationary pressures, debt stress and unstable growth.
According to economists, Pakistan's economic problems have been compounded by decades of flawed policies and the failure to implement reforms in taxation, the energy sector and human capital. They argue that weak institutions, corruption and elite capture have created what they describe as an "institutional trap," undermining inclusive development.
Experts say the country needs better coordination between fiscal and monetary policies, alongside structural reforms to address infrastructure gaps, low digital literacy and weak confidence. Without more inclusive institutions, they warn, economic growth is likely to remain unstable, citizens will continue to be highly vulnerable to economic shocks, and inflationary pressures will keep undermining any progress achieved by the economy.
