Renewed Middle East tensions pose downside risks to inflation, external sector: finance ministry

Pakistan's Ministry of Finance anticipates double-digit inflation as the new fiscal year begins, expressing concern over escalating geopolitical tensions in the Middle East. These renewed conflicts are seen as posing significant downside risks to both inflation and the nation's external economic outlook, according to the ministry's Monthly Economic Update & Outlook for July 2026.

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Renewed geopolitical tensions in the Middle East pose downside risks to inflation and the external outlook.

Despite these external pressures, the ministry assured that the external sector is expected to remain resilient. This resilience will be bolstered by government initiatives aimed at facilitating exports and sustaining the strong inflow of remittances. Prudent macroeconomic management, fiscal discipline, ongoing structural reforms, robust industrial activity, and improved external buffers are projected to sustain economic recovery while maintaining macroeconomic stability.

The ministry highlighted that macroeconomic stabilization was largely achieved in the fiscal year 2026. The economy is expected to continue its growth trajectory in the current fiscal year, driven by improving macroeconomic fundamentals, continued expansion in the manufacturing sector, fiscal consolidation, agricultural resilience, and a stable financial environment. Manufacturing activity, in particular, is predicted to maintain its positive trend, supported by reliable energy supply, easing financial conditions, growing domestic demand, and a focus on export-oriented production.

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Overall, prudent macroeconomic management, fiscal discipline, ongoing structural reforms, stronger industrial activity and improved external buffers are expected to sustain the recovery in economic activity while preserving macroeconomic stability.

However, inflation is expected to remain elevated in the near term, with the Consumer Price Index (CPI) projected to be between 9-10% in July 2026. The ministry also cautioned that the normalization of global energy prices is contingent on a lasting peace agreement between the United States and Iran. Meanwhile, key economic indicators suggest that Pakistan's major export markets, including the UK and the US, are performing in line with their long-term potential, indicating continued external demand support, though geopolitical risks remain.

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Inflation, however, is expected to remain elevated in the near term, with CPI inflation projected in the range of 9-10 per cent in July 2026.