Renewed Middle East tensions pose downside risks to inflation and the external outlook
The recent escalation of tensions between Iran and Israel has raised concerns about the potential impact on global economic stability. The renewed geopolitical tensions in the Middle East have sparked fears that they could lead to a rise in inflation, which would be particularly challenging for Pakistan’s economy.
As the government prepares for the new fiscal year, it is anticipating double-digit inflation, with CPI inflation projected at 9-10 per cent in July 2026. This increase in inflation will likely put pressure on the Pakistani rupee and could lead to higher import costs, which would further exacerbate inflationary pressures.
The Ministry of Finance has expressed concern that renewed geopolitical tensions could pose downside risks to inflation and the external outlook. The ministry noted that macroeconomic stabilisation had largely been achieved in FY2026, but warned that normalisation of global energy prices remained contingent on a durable and lasting peace agreement between the US and Iran.
In terms of the economy’s performance, manufacturing activity is likely to maintain its positive trajectory, driven by stable energy availability, easing financial conditions, improving domestic demand, and continued export-oriented production. The ministry also highlighted the resilience of Pakistan’s agriculture sector, which maintained moderate growth despite weather-related challenges.
The government has made significant strides in promoting economic recovery during FY2026, including improved revenue mobilisation and prudent expenditure management. IT exports reached a record $4.6 billion (up 20.6pc from last year), underscoring the country’s growing potential in technology and digital services.
However, the ministry warned that renewed US-Iran hostilities could once again pose downside risks through global energy prices, trade, and financial market volatility. Nevertheless, it concluded that stronger macroeconomic fundamentals, improved external buffers, government readiness, and continued policy vigilance have enhanced Pakistan’s capacity to manage such shocks effectively.
The recent developments in the Middle East are a reminder of the importance of maintaining economic stability and managing risks. As the world continues to navigate complex global challenges, policymakers must remain vigilant and proactive in addressing potential threats to economic growth.
Source: Dawn
Based on reporting from Dawn.
