KARACHI: Prolonged high global oil prices triggered by the ongoing Middle East conflict could reduce the GDP of Pakistan by 1 to 1.5 percent if crude prices remain around $100 per barrel or higher, according to former finance minister Hafiz Pasha.
Pasha warned that the most severe impact would be felt in Pakistan’s external sector, where the country could face a negative shock of $12–14 billion over the next year. The surge would be driven largely by petroleum imports, which may rise by 25–30 percent as global oil prices climb. In addition, escalating shipping and insurance costs due to regional instability are expected to further inflate the country’s import bill.
Remittances could also come under pressure. Nearly 55 percent of Pakistan’s overseas remittances originate from Middle Eastern economies. If oil-exporting states in the region face economic contraction due to disruptions in energy exports, the demand for foreign labour could decline. Workers from countries such as Pakistan and Bangladesh are often among the first to lose employment, potentially reducing Pakistan’s remittance inflows by $2–4 billion.
Combined, these pressures could push Pakistan’s current account deficit from the currently manageable $2 billion to between $6 billion and $7 billion by the end of the fiscal year. With only a few months remaining in the current fiscal cycle, the larger deterioration is expected to appear in FY2026–27.
Economists warn that the situation could mirror the economic crisis of 2021–22, when foreign exchange reserves dropped to around $4 billion. Without improvement in the global energy environment, pressure on the country’s reserves could again become unsustainable.
Higher oil prices could also trigger a return to double-digit inflation, reversing the relative stability achieved during FY25. While inflation stood near 7 percent in February, it has already crossed the 10 percent mark and may accelerate further if global oil prices approach the $120 levels seen during the Russia–Ukraine War energy shock, when inflation in Pakistan surged close to 30 percent.
Economic growth, which had been gradually recovering toward the 3 percent mark before the recent escalation involving the United States and Iran, now faces renewed risks. Three major sectors—transport, industry, and agriculture—are particularly vulnerable.
The transport sector, which accounts for roughly 10 percent of the economy, is likely to contract as higher fuel prices reduce demand. Industrial production is also under pressure as disruptions in imported liquefied natural gas (LNG) supplies affect fertiliser, cement, and textile manufacturing. Textile producers that rely on captive gas-based power generation are already facing rising operational costs.
Agriculture may also be affected, as disruptions in fertiliser supply—linked partly to energy supply constraints and issues involving Qatar—could reduce productivity in the upcoming crop cycle.
Former State Bank of Pakistan governor Ishrat Hussain highlighted the sensitivity of Pakistan’s economy to oil price movements. He noted that every $10 increase in crude oil prices raises the country’s annual import bill by approximately $1.5 billion. If oil remains $20 above the pre-war benchmark of $80 per barrel, Pakistan could face an immediate $3 billion shortfall.
To manage volatility, Hussain suggested shifting from weekly to daily fuel price adjustments so domestic prices more closely track global markets. Such a system could discourage hoarding and provide clearer signals to consumers.
The crisis has also exposed vulnerabilities in Pakistan’s energy supply chain. Disruptions in imported RLNG supplies, including a recent force majeure declaration by Qatar, have forced the country to reactivate domestic Sui gas reserves that were previously underutilised.
However, expanding the use of indigenous energy sources is constrained by inadequate transmission infrastructure for several existing wind and coal power projects. In the short term, analysts believe Pakistan must accelerate the use of domestic energy resources—hydropower, nuclear, local coal, domestic gas, wind, and solar—to reduce dependence on costly imported fuels.
Despite the immediate challenges, some economists view the crisis as an opportunity to restructure Pakistan’s energy model. By rapidly expanding domestic power generation and transmission capacity, the country could reduce its long-standing reliance on imported energy.
Pakistan’s financial stability remains closely tied to support from the International Monetary Fund (IMF). Economist Kaiser Bengali warned that Pakistan is in a position of “absolute dependency,” where even a $1 billion IMF tranche could determine whether the economy stabilises or faces renewed financial stress.
Bengali also criticised symbolic austerity measures, calling them “austerity theatre” that fails to address structural economic challenges. Instead, he proposed more concrete steps such as petrol rationing—limiting consumption to around 150 litres per vehicle per month—to curb fuel demand.
In the medium term, shifting intercity freight transport from roads to railways could reduce diesel imports by 15–20 percent due to rail’s higher fuel efficiency.
Beyond economic risks, analysts also warn of potential geopolitical implications. Pakistan’s defence ties with Saudi Arabia could draw the country into a wider regional confrontation if tensions escalate with Iran.
Experts caution that if the United States seeks access to Pakistani bases for military operations against Iran, the resulting retaliation could expose Pakistan to direct security threats—turning an economic crisis into a broader regional conflict.
Story by Fatima S Attarwala
