The government is bracing for a challenging start to the new fiscal year, with inflation expected to hover in double digits even as it cautions that renewed geopolitical strife in the Middle East could further strain the economic outlook. Main Developments In its Monthly Economic Update & Outlook for July 2026, the Ministry of Finance flagged that fresh tensions in the region pose downside risks to both inflation and the external sector. The assessment comes as authorities project consumer price index (CPI) inflation to remain between 9 and 10 percent in July 2026, a level that underscores persistent price pressures. Despite these concerns, the ministry expressed confidence in the economy's resilience, citing government measures to boost exports and sustain robust remittance inflows. It noted that prudent macroeconomic management, fiscal discipline, and ongoing structural reforms are expected to keep the recovery on track while preserving stability. Read also: Pakistan's waters off war-risk list after two decades The report also highlighted positive momentum in manufacturing, agriculture, and the external sector. Large-scale manufacturing rebounded, agriculture posted moderate growth despite weather challenges, and the current account recorded only a marginal deficit of $140 million. Record-high workers' remittances and higher foreign exchange reserves helped offset the import recovery tied to stronger domestic activity. Background The latest warning follows a period of stabilization gains in FY2026, during which average CPI inflation stayed within the targeted range despite elevated global oil prices and supply chain disruptions. The finance ministry noted that the economy entered FY2027 with an improved macroeconomic environment, supported by better revenue mobilization and prudent expenditure management. External confidence has also strengthened, with S&P Global Ratings recently upgrading Pakistan's long-term sovereign credit rating to B from B-. The upgrade reflects improved institutional capacity, sustained reform implementation, better fiscal performance, and a significant rebuilding of foreign exchange reserves. However, the ministry reiterated that normalisation of global energy prices remains contingent on a durable and lasting peace agreement between the US and Iran. Renewed hostilities between the two nations could reignite volatility in energy prices, trade, and financial markets. Why It Matters The warning carries significant weight for Pakistan's economic trajectory. With inflation already expected to be elevated, any fresh spike in global energy prices could push consumer prices higher, eroding purchasing power and complicating the central bank's monetary policy stance. The external sector, while broadly balanced, remains vulnerable to shocks. A deterioration in the current account or a dip in remittances could undermine the hard-won gains in foreign exchange reserves, which have been pivotal in stabilizing the currency and restoring investor confidence. For businesses and households, the outlook signals continued cost pressures in the near term. For policymakers, it underscores the delicate balance between sustaining growth and maintaining fiscal and external discipline in an uncertain global environment. What's Next The government has set a real GDP growth target of 4 percent for FY2027, underpinned by continued advancement of the reform agenda. Key priorities include deepening financial markets, broadening the domestic investor base, strengthening debt sustainability, and enhancing Pakistan's presence in global capital markets. On the external front, the ministry pointed to encouraging signs: IT exports reached a record $4.6 billion, up 20.6 percent from last year, and 38,410 workers were registered for overseas employment in June 2026. These trends, if sustained, could provide additional buffers against external shocks. Yet the path forward hinges on developments beyond Pakistan's control. Whether the US-Iran situation stabilizes or escalates will largely determine how much pressure materializes on energy prices and global financial conditions. The ministry has stressed that stronger fundamentals, improved buffers, and policy vigilance have enhanced the country's capacity to manage such shocks effectively.