Finance ministry warns of risks despite economic gains

US-Iran tensions pose fresh risks as remittances, stocks surge but exports, FDI decline

ISLAMABAD:

The Ministry of Finance has cautioned that renewed escalation in tensions between the United States and Iran could trigger volatility in global energy prices, trade flows and financial markets, posing fresh risks to Pakistan's economic outlook despite improving domestic indicators.

In its latest monthly economic outlook report, the ministry said the economy entered FY2026-27 on a relatively stronger footing, supported by macroeconomic stability achieved last year. However, it warned that external shocksparticularly energy price spikescould disrupt this trajectory.

During FY2025-26, workers' remittances rose to $41.6 billion from $38.3 billion, marking an 8.6% increase, while the stock market posted robust gains. The benchmark index surged 27.6% year-on-year to 176,042 points by July 29, 2026, with market capitalisation rising 19.4% in rupee terms and 21.6% in dollar terms.

However, the gains were offset by structural weaknesses in the external sector. Exports declined to $30.8 billion from $32.3 billion, while imports rose sharply to $64.5 billion from $59.1 billion. Foreign direct investment fell to $1.64 billion from $2.48 billion, and portfolio investment remained negative. Despite these pressures, the current account deficit remained contained at $139 million, supported by record remittance inflows and improved foreign exchange reserves, which reached $22.7 billion by mid-July 2026. The rupee also appreciated slightly to Rs277.80 against the dollar, compared to Rs283.05 a year earlier.

Inflation averaged 7.1% during FY2026, staying within the government's target despite elevated global oil prices and supply chain disruptions. Large-scale manufacturing rebounded with 5.8% growth, reversing a contraction of 1.1% last year, while the agricultural sector maintained moderate expansion despite adverse weather conditions. Fiscal consolidation also improved, driven by stronger revenue collection and disciplined expenditure management. Meanwhile, agricultural credit disbursement rose 21.4% to Rs2.79 trillion, although private sector lending declined and monetary expansion slowed. The policy rate was raised marginally to 11.5%.

The report highlighted continued progress in financial deepening, with the number of newly registered companies rising 24.1% to 43,559. IT exports also recorded strong growth, increasing 20.6% to a record $4.6 billion. In recognition of these gains, S&P Global Ratings upgraded Pakistan's sovereign credit rating from B- to B, citing improved fiscal performance, rising reserves and sustained reform momentum.