Yet, just as things begin to settle, rising global tensions threaten to disrupt this fragile balance. In the first quarter of fiscal year 2025–26, the country’s GDP growth edged up to 3.7%, compared to 3.1% last year.

It’s not a dramatic leap, but it’s a steady step forward. Economic planners believe the growth rate could touch 4% by the end of the year, largely driven by a stronger industrial sector.

Industry, in particular, has been the quiet engine behind this improvement. With growth reaching over 9% in early months and manufacturing activity expanding consistently, factories are beginning to hum again. Increased fuel consumption and a rise in machinery imports hint that economic wheels are turning at a healthier pace.

Another encouraging sign is the revival of investment. After years of hesitation, businesses are borrowing more, importing equipment, and expanding operations. Government development spending has also picked up, adding further momentum to the economy.

Inflation, once a major concern, has stayed within single digits. However, the recent uptick from around 4% to 7% suggests that price pressures are not entirely gone. It’s a reminder that stability can be delicate and easily unsettled.

On the fiscal front, the government has managed to post a budget surplus, helped significantly by central bank profits. Still, slower-than-expected tax collection raises questions about long term sustainability.

Externally, the situation appears manageable. The current account deficit remains small, foreign exchange reserves have improved, and support from international lenders provides a financial cushion. For now, Pakistan seems better prepared to handle external shocks.

But the real test lies beyond its borders.

The ongoing conflict in the Middle East casts a long shadow over these gains. If tensions escalate and disrupt oil supplies especially through critical routes like the Strait of Hormuz the ripple effects could be severe.

Higher oil prices would act like a chain reaction: increasing transport costs, pushing up food prices, and squeezing household budgets. A sharp rise in fuel costs could add several percentage points to inflation, potentially pushing it back into double digits.

Economic growth could also take a hit. Energy-intensive sectors such as textiles, transport, and manufacturing would feel the pressure first. Even a modest drop in fuel availability could shave off a noticeable portion of GDP growth.

There’s another layer to this challenge. Pakistan relies heavily on remittances from the Middle East. If oil-exporting economies slow down due to reduced revenues, job opportunities for overseas workers may shrink, leading to a dip in remittance inflows.

Exports, too, face a subtle risk. As production and transport costs climb, Pakistani goods could become less competitive in global markets especially in sectors like textiles where margins are already tight.

All of this points to one clear need: flexibility. A market-based exchange rate policy could help absorb external shocks and keep the economy aligned with global realities. It may not solve every problem, but it can act as a pressure valve when conditions tighten.

In simple terms, Pakistan’s economy is on a better path, but it’s walking a narrow road. Progress is real, but so are the risks. What happens next will depend not only on domestic policies, but also on forces far beyond the country’s control.