KARACHI/ISLAMABAD: The Ministry of Finance has described Pakistan’s near-term economic outlook as “cautiously optimistic” despite rising geopolitical risks following the US-Israel conflict with Iran.
In its Economic Outlook released on Tuesday, the ministry said inflation is expected to remain in the range of 7.5-8.5 per cent in March 2026. Remittance inflows are projected to stay strong, supported by Eid-related transfers, although their trajectory will depend on economic conditions in host countries. Growth in IT exports is also supporting foreign exchange earnings.
The report said the current account deficit is likely to remain manageable, though higher oil prices pose risks to the import bill. It added that recent indicators suggest the economy is better positioned to absorb external shocks.
The ministry said proactive planning and energy-sector austerity measures were helping secure fuel supplies and ensure smooth operations. It added that ongoing reforms and domestic progress were supporting medium-term growth prospects.
Industrial activity is showing signs of improvement, with higher imports of textile machinery and construction-related inputs expected to support output. However, rising oil prices and potential supply disruptions could increase input costs.
The government is pursuing measures including maintaining petroleum reserves, managing energy demand and adhering to fiscal discipline to shield the economy. In February 2026, the current account posted a surplus of $427 million, bringing the deficit for July--February FY2026 to $700 million. Exports of goods and services stood at $27.2 billion, slightly down from $27.4 billion a year earlier, with goods exports at $20.7 billion, largely driven by textiles. Services exports rose, led by a 19.7 per cent increase in IT services to $3 billion.
Imports rose to $50.4 billion from $46 billion, widening the trade deficit in goods and services to $23.2 billion from $18.6 billion. The increase was driven by higher imports, while exports remained largely flat due to a decline in food shipments, particularly rice.
Remittances increased 10.5 per cent to $26.5 billion, mainly from Saudi Arabia and the UAE. Net foreign direct investment stood at $1.2 billion, with China and Hong Kong the main contributors, while inflows were concentrated in the power and financial sectors.
For the 2025-26 Rabi season, wheat production is targeted at 29.7 million tonnes, up from 28.4 million tonnes last year. Sowing has improved due to government support, though final output will depend on weather conditions. Agricultural credit disbursement rose 11.1 per cent to Rs1,649 billion in July-January FY2026, while imports of agricultural machinery increased 17.1 per cent to $90.8 million. Urea offtake rose 7.1 per cent during the Rabi season, while DAP offtake stood at 685,000 tonnes.
Separately, in its latest report released on Tuesday, Allianz Research said that the Middle East is set to weigh on global growth while fuelling inflation and fiscal pressure, creating a difficult backdrop for central banks. In its latest outlook for 2026-27, the firm cut its global growth forecast to 2.6 per cent for 2026, down 0.5 percentage points, while revising inflation higher to 3.2 per cent in the US and 3.0 per cent in the eurozone. Trade growth is also seen slowing to 1.5 per cent.
Growth in the US is expected to hold at 2.1 per cent and at 0.8 per cent in the eurozone, with budget deficits remaining elevated and higher debt-servicing costs limiting policy support. Oil prices are projected to hover around $80 a barrel by end-2026 after spiking earlier in the year on geopolitical tensions.
The US Federal Reserve is expected to look through the inflation spike and keep rates unchanged, with a single cut seen in early 2027. The European Central Bank may deliver a 25 basis-point hike before pausing as growth weakens.
The report said Gulf economies and parts of Asia remain most exposed to the shock, while China is still expected to grow by 4.6 per cent in 2026. Economies with simultaneous fiscal, current account and energy deficits face heightened risks of capital outflows, inflation and recession. By contrast, some commodity exporters, particularly in Latin America, may benefit.
Allianz warned of a broad cost shock for businesses and households, driven by higher energy, metals and fertiliser prices, alongside weak demand and elevated US tariffs. Energy and defence sectors stand to gain, while energy-intensive industries, transport and consumer sectors face margin pressure. Global insolvencies are expected to rise as financial conditions tighten and demand weakens.
Financial markets have already begun pricing in stagflation risks, with rising bond yields, equity losses and a stronger US dollar since the conflict escalated. Investors have shifted towards cash, while credit spreads have widened modestly.
In a baseline scenario where the conflict eases within three months, Allianz expects markets to recover later in the year. However, it warned that a prolonged disruption -- including a closure of the Strait of Hormuz -- could push the global economy into a stagflationary recession.
In such a scenario, oil prices could briefly surge to $180 a barrel, with the eurozone slipping into near-stagnation and US growth slowing sharply. Inflation could rise to around 4.9 per cent in the US and 4.6 per cent in the eurozone, forcing central banks into further rate hikes despite weaker growth.
Markets would face deeper stress, including higher bond yields, sharp equity declines and wider credit spreads, alongside a stronger dollar and tighter liquidity conditions, the report said.
