Renewed Middle East tensions pose downside risks to inflation and the external outlook
The Pakistani economy is expected to continue its growth momentum in the current fiscal year, driven by improved macroeconomic fundamentals, sustained export-oriented production, and a stable financial environment. However, renewed geopolitical tensions in the Middle East pose significant downside risks to inflation and the external outlook.
According to the Ministry of Finance’s Monthly Economic Update & Outlook (July 2026), the government has anticipated double-digit inflation for the new fiscal year due to increased global oil prices and supply chain disruptions. The ministry expressed concern that these factors could lead to a rise in CPI inflation, with projections ranging from 9-10 percent in July 2026.
Despite this, the economy is expected to maintain its growth momentum, supported by “improving macroeconomic fundamentals” and continued expansion in key sectors such as manufacturing, agriculture, and remittances. The ministry also highlighted Pakistan’s resilience in maintaining a strong external sector, with record-high IT exports reaching $4.6 billion (up 20.6 percent from last year).
However, the government has warned that normalisation of global energy prices remains contingent on a durable and lasting peace agreement between the US and Iran. This is likely to pose downside risks to inflation, particularly if tensions escalate.
The Ministry of Finance also noted that renewed geopolitical tensions could lead to trade and financial market volatility, which would further exacerbate inflationary pressures. Nevertheless, it emphasized Pakistan’s capacity to manage such shocks effectively through its macroeconomic fundamentals, improved external buffers, government readiness, and continued policy vigilance.
In terms of the external sector, the ministry stated that it remained broadly balanced, with a marginal deficit of $140 million in the current account. Record-high workers’ remittances and higher foreign exchange reserves helped offset the import recovery associated with strengthening domestic economic activity.
The finance ministry also highlighted Pakistan’s growing potential in technology and digital services, with IT exports reaching a record $4.6 billion (up 20.6 percent from last year). This growth is expected to continue into FY2027, driven by sustained institutional capacity, improved implementation of reforms, and the rebuilding of foreign exchange reserves.
Overall, while renewed geopolitical tensions pose significant risks to inflation and the external outlook, Pakistan’s macroeconomic fundamentals remain strong, and its government has demonstrated a commitment to managing such shocks effectively. As always, it is essential for policymakers to continue monitoring these developments closely and taking necessary measures to mitigate any potential negative impacts on the economy.
Source: Dawn
Based on reporting from Dawn.
