The world is living through an inflation hangover that refuses to fade. Prices have eased from the post-pandemic highs, yet the disinflation story keeps stalling because global policy itself has become the new shock. The IMF’s latest World Economic Outlook projects global growth at about 3.2 per cent in 2025 and 3.1 per cent in 2026-hardly a crisis, but too soft to restore confidence. The texture of that growth is unsettling: tariffs, subsidies, and industrial policies are replacing open trade and efficiency as drivers of investment. That transition is breeding uncertainty, keeping prices sticky, and re-pricing risk across every emerging economy, Pakistan included.
The OECD’s September 2025 report warns that higher tariffs and policy unpredictability are now slowing investment, trimming its growth forecast to 3.2 per cent for 2025 and 2.9 per cent for 2026. Even as financial conditions have eased and stock markets look buoyant, the OECD notes that asset valuations sit on shaky fiscal ground. Translation: markets may look calm, but the underlying policy terrain is unstable.
Corporate sentiment echoes the anxiety. McKinsey’s global survey shows trade-policy shifts and geopolitics as the two biggest perceived risks to growth. That perception isn’t paranoia. The tariff front-loading wave of 2024-25 temporarily inflated demand, then left inflation stickier once supply chains adjusted. The IMF attributes much of the lingering price pressure to this artificial front-loading and renewed fragmentation. In short, the disinflation that central banks fought for two years is being undone by political and policy choices rather than by monetary excess.
If inflation stays near 5 percent and reserves climb toward the SBP’s projected US$17.8 billion by June 2026, the Bank can signal a conditional easing bias for mid-2026-contingent on core inflation and external balance.
In advanced economies, energy base effects pulled headline inflation down, but core services inflation stayed firm. In developing countries, the pass-through from tariffs, floods, and currency weakness kept imported inflation alive. The World Bank’s Global Economic Prospects downgraded its 2025 forecast for that very reason: trade barriers and geopolitical noise are now structural drags, not temporary shocks. Global growth today depends less on interest-rate tweaks and more on how governments behave.
For Pakistan, this shift from economics to politics has real consequences. The State Bank of Pakistan (SBP) has already travelled from the crisis-era 22 per cent policy rate in 2024 to 11 per cent today-a cumulative 1,100 basis-point easing. It has paused for four consecutive meetings as inflation re-accelerated to 5.6 per cent in September after months of decline. Real rates now hover more than 500 basis points above inflation, shielding the rupee but also suppressing private investment at a time when global demand is fragile. A world of tariff wars and supply rerouting means fewer export tailwinds just as domestic capital becomes expensive. Policy predictability, not merely cheaper money, has become the missing ingredient of growth.
Yet Pakistan can’t pivot recklessly. The IMF and markets will not tolerate a premature rate cut that triggers import inflation or capital flight. But stagnation has its own price: weaker revenues, costlier debt, and rising social fatigue. The SBP’s October statement explains the dilemma-hold rates steady, maintain real-positive returns, and protect the 5-7 per cent medium-term inflation target despite supply shocks from floods and food prices. Sensible, but frustrating for industry and households alike.
Globally, the inflation puzzle is no cleaner. The IMF notes that tariff expansions and subsidy races are keeping inflation slightly higher and more persistent than earlier forecasts, even in the United States. An AI-driven investment boom has temporarily boosted U.S. growth, masking underlying fragility if productivity fails to catch up. Should that boom cool-or if new tariffs hit Asian inputs-the resulting cost shock would push prices up while restraining output. Emerging markets like Pakistan would import both inflation and the slowdown.
Such uncertainty infiltrates firm behaviour everywhere. When tariff regimes shift overnight and export controls widen, supply chains favour redundancy over efficiency. That translates into higher working-capital requirements, pricier trade finance, and a premium for inventory buffers. For Pakistani exporters of textiles, rice, and leather, this means tighter margins unless they upgrade technology or secure long-term offtake contracts. For importers of machinery, it means erratic investment cycles. The antidote is domestic credibility: stable tax rules, predictable energy pricing, and contracts that survive political turnover.
Inflation’s recent rebound at home proves how external and local shocks intertwine. The September CPI of 5.6 per cent-after a temporary trough-showed that food and energy prices can swing fast under weather and supply disruptions. The Finance Ministry expects October inflation in the 5-6 per cent range, consistent with SBP caution. The short-term goal is to avoid a second wave; the long-term one is to raise productivity without reopening the current-account gap. That demands investment and efficiency, not just liquidity injections.
Policy solutions must therefore revolve around credibility. Pakistan’s best stimulus today is predictability. A three-year “Predictability Charter” could commit to no retrospective taxation, fixed refund timelines, and a published tariff-phase-down schedule for key inputs. Every new levy should automatically expire unless Parliament renews it after a cost-benefit review. In a world of arbitrary external rules, boring domestic policy is a competitive edge. It lowers risk premiums and financing costs more effectively than cosmetic rate cuts.
Next, monetary and fiscal coordination must preserve disinflation without strangling credit. With KIBOR and Treasury yields around 11-12 per cent, the government should lengthen its debt profile and smooth auctions to reduce volatility. Targeted credit guarantees for export-oriented technology upgrades-such as energy-efficient looms, traceability software, and green dye units-can unlock private investment without blanket subsidies. Guarantees should be small, time-bound, and linked to verified export performance.
Supply-side fixes are the best inflation insurance. Rather than relying on administrative price controls, Pakistan should accelerate cold-chain infrastructure, clear imports of quality seeds and fertilisers, and temporarily subsidise logistics in flood-hit corridors. OECD and IMF assessments both emphasise that tariff disruptions will keep import costs jumpy; the only lasting defence is efficient domestic logistics that cut spoilage and delivery time.
Exports need reliability more than rhetoric. Government-facilitated templates for three-year offtake contracts-with arbitration and FX-convertibility clauses-between Pakistani suppliers and foreign buyers can substitute for the missing credibility premium. Coupled with export-credit insurance and pre-shipment finance backed by limited sovereign guarantees, such instruments can transform uncertainty into a business opportunity.
Energy remains the wild card. Future inflation spikes will likely emerge from fuels or fertilisers. Pakistan should institutionalise hedging for key petroleum products and negotiate swap lines for LNG that activate automatically at defined price thresholds. This is standard risk management globally-reducing the chance that each commodity shock forces an overreaction in monetary policy.
At the same time, Pakistan should ride the global AI wave strategically. The IMF attributes part of U.S. resilience to AI investment; Pakistan can tap the services layer-data labelling, model evaluation, and domain-specific automation for logistics and agriculture. With stable taxation and training vouchers, these exports can scale without large capital costs. Selling “picks and shovels” to the AI gold rush is a pragmatic hedge against manufacturing volatility.
Finally, clarity on the policy-rate path matters. If inflation stays near 5 per cent and reserves climb toward the SBP’s projected US$17.8 billion by June 2026, the Bank can signal a conditional easing bias for mid-2026-contingent on core inflation and external balance. Such forward guidance can compress yields even before actual cuts, lowering investment hurdles while safeguarding stability.
The lesson of this inflation hangover is simple: uncertainty is the new tax on growth. The global economy will remain noisy-IMF sees moderate growth, OECD warns of tariff drag, and corporate boards cite policy confusion as their top risk. Pakistan cannot rewrite that script, but it can decide not to be trapped by it. The way out is neither reckless stimulus nor endless austerity. It is rules that outlast ministers, logistics that outlast floods, contracts that outlast tariff cycles, and a fiscal-monetary compact that bleeds uncertainty out of prices. In a world of policy chaos, predictability is power-and the only inflation cure that doesn’t depend on luck.
The writer is a financial expert and can be reached at jawadsaleem.1982@ gmail.com. He tweets @JawadSaleem1982