Wars have unexpected consequences – for the aggressors and the aggressed though the ongoing Middle East conflict is marked by significant miscalculations by the aggressors due to their dismissal of the exhaustive retaliatory threats by the aggressed prior to the launch of the attack on 28 February.
Also unprepared for retaliatory attacks on their physical infrastructure, including the energy sector, were the fuel-rich Gulf states, as well as their customers as far away as in South America (Chile, Brazil, Argentina, Peru, Paraguay, Uruguay), Europe (Italy, Spain, France, the Netherlands and Germany), and Africa (Egypt, South Africa, Nigeria, Kenya, Morocco, Sudan); and as near as in Asia (Pakistan, China, India, Japan, South Korea, and Taiwan).
The disruption of energy trade and the closure of airspace in the Gulf has left hundreds of thousands stranded unable to leave the Gulf – long considered a tourist and investment haven – a reputation hard-earned over decades but once lost perhaps not that easy to reestablish.
Inflationary pressures are strengthening globally subsequent to the closure of the Strait of Hormuz (estimated to account for 20 to 25 percent of global trade in oil and liquefied natural gas) with oil prices rising from the low to mid-60 dollars a barrel prior to the commencement of hostilities to over 90 dollars per barrel by Friday and rising. Stock markets tumbled in many countries, including Pakistan. The International Monetary Fund (IMF), the multilateral dictating monetary and fiscal policy to Pakistan under the ongoing 7 billion-dollar Extended Fund Facility (EFF) and 1.4 billion-dollar under the Resilience and Sustainability Facility (RSF), uploaded the following press release on its website: “So far, we have observed disruptions to trade and economic activity, surges in energy prices, and volatility in financial markets. The situation remains highly fluid and adds to an already uncertain global economic environment. It is too early to assess the economic impact on the region and the global economy. That impact will depend on the extent and duration of the conflict. We will provide a comprehensive assessment in our April World Economic Outlook.”
The First Deputy Managing Director of the IMF Dan Katz while addressing the Milken Institute Future of Finance conference in Washington DC last week stated the obvious: that the war’s impact on the global economy will depend on its duration and damage to infrastructure and industries in the region, particularly whether energy price increases are short lived or persistent and geopolitical developments that would enable the Fund to fine-tune its projections. He acknowledged that the conflict could be “very impactful on the global economy across a range of metrics, whether its inflation, growth and so on.”
Governor State Bank of Pakistan (SBP) while addressing the parliamentary committee on Finance this Wednesday past projected a growth rate of 3.75 to 4.75 percent (the budgeted rate for the current year was 4.2 percent), in spite of what he termed as “regional conflict.” His optimism maybe premised on the recent reported completion of SBP’s discussions with the Fund staff (25 February) on the third review with the objective of reaching a staff level agreement that would trigger a board meeting for approval of the next tranche release.
However, any deviation from the projected outcome on the global economy in general and Pakistan in particular would almost certainly lead the Fund staff to revisit the agreed conditions with the SBP. This perception is strengthened by Katz’s statement: “Ï would expect central banks to be cautious and respond to the situation as it materializes,” which may well be a harbinger of a rate rise or a stable rate even though there has been considerable domestic pressure on the Monetary Policy Committee, headed by the Governor, scheduled to meet on 9 March (today) to reduce the 10.5 percent discount rate as it is double that of our regional competitors.
Pakistan relies on fuel imports – about 85 percent fuel from Gulf countries, including the Abu Dhabi National Oil Company, and 99 of LNG from Qatar. It is relevant to note that for 2026 the government requested diverting 35 to 45 LNG cargoes (24 from Qatar) to the international market, given that the much touted 2016 deal with Qatar grossly over-estimated domestic demand. As and when Qatar restarts LNG exports any increase from the 2016 agreed price would be pocketed by Qatar while any decrease in the international price would have to be met by Pakistan - a contract that indicates not only poor projection of demand skills but also poor legal expertise by the then government.
A shortfall in fuel supplies would reduce collections under petroleum levy (budgeted at 1.468 trillion rupees in the current year) – over time a major source of federal revenue that is not part of the federal divisible pool. For the first six months the government collected 822.9 billion rupees under this head and has budgeted to collect 645,495 billion rupees for the next six months. Failure to collect this amount would raise the budget deficit, a highly inflationary policy. The government may be forced by the Fund to implement the agreed contingency measures – raising taxes on some other items – or raise the levy further as it no longer has an upper limit to contain inflation; as well as require the SBP to raise the discount rate.
Minister for Petroleum disclosed on Tuesday after a meeting with the Saudi Ambassador that Pakistan would be able to access Saudi oil through the Red Sea port. He needs reminding of two major well reported lacunae in that route: (i) the Saudi-Houthi relations remain tense to this day subsequent to the eruption of hostilities between the two in 2015; and (ii) the Houthis have all but disabled shipping via the Red Sea to choke the Israeli port of Eilat as retaliation against the Palestinian genocide by Israel. It is hoped that the Foreign Minister engages with the Houthis to allow fuel sales to Pakistan through the Red Sea.
A week into the conflict the government has opted to raise petrol and products prices to a level that it reckons would dampen demand till such a time as fuel supplies are restored. This decision must be supported. Prior to this decision the Prime Minister set up two committees – one under the chairmanship of the Finance Minister and another under the chairmanship of the Maritime Affairs Minister – both tasked to monitor and propose mitigating measures to deal with negative fallout of the Middle East conflict. This indicates full awareness of the issues Pakistan may be forced to deal with and must be appreciated. However, the government must also consider curtailing its current outlay rather than taking measures that would raise poverty rate even higher than the current disturbing 44.7 percent as estimated by the World Bank in its June 2025 report.
Copyright Business Recorder, 2026
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