Pakistan's economy is facing intensifying stress as annual inflation climbed to 11.7 per cent in May 2026, well above the State Bank of Pakistan's target band of 5–7 per cent, according to a new report by Morocco-based media house Assahifa. Economists have warned the country risks sliding into a damaging cycle of weak growth, rising prices, and prolonged financial strain.

Inflation Trajectory

The latest figure marks a sharp acceleration from 10.9 per cent in April and 7.3 per cent in March, reflecting a sustained upward trend over the past quarter. Transport costs and perishable food prices have each surged by approximately 15 per cent, according to the report, compounding pressure on household budgets. A severe foreign-exchange squeeze and a soaring oil import bill have further eroded purchasing power and weighed on economic activity.

External Shocks and Energy Costs

Pakistan's vulnerability to external disruptions has been laid bare by the US-Iran conflict, which has disrupted global supply chains. Analysts note that Pakistan is disproportionately exposed to such shocks given its heavy dependence on imported energy and its fragile balance-of-payments position. Prime Minister Shehbaz Sharif was cited in the report as saying the country's oil import bill had surged from $300 million to $800 million since the conflict began, effectively 'erasing all the economic progress the country had made over the past two years.'

Wrong Medicine, Wrong Diagnosis

In response to rising prices, the State Bank of Pakistan recently raised its policy rate by 100 basis points — from 10.50 per cent to 11.50 per cent. However, economists have criticised the move as 'wrong medicine for the wrong diagnosis.' They argue that higher interest rates are effective when inflation is demand-driven, but Pakistan's current inflation is rooted in supply-side distortions — making a rate hike counterproductive. The risk, analysts warn, is that tighter monetary conditions will choke investment and push the economy toward stagflation.

Credit Squeeze and Private Sector Strain

On the supply side, a troubling dynamic has reportedly emerged: commercial banks are increasingly preferring to lend to the government by investing in state securities rather than extending credit to private businesses. Low confidence and economic uncertainty are driving this shift, analysts say, further starving the private sector of capital at a time when it needs it most. This comes amid a broader pattern of Pakistan's economy lurching from one balance-of-payments crisis to another over the past decade, with structural reforms repeatedly deferred.

What Comes Next

With inflation well outside the central bank's target range and monetary policy tools yielding limited results, Pakistan faces difficult choices. Economists suggest that addressing supply-side bottlenecks — including energy import dependency and foreign-exchange fragility — is essential before monetary tightening can have any meaningful impact. Whether Islamabad can navigate this without triggering a deeper economic contraction remains an open question.