ME conflict: what should be our economic policy response?

The Iran war is now in its third week. In addition to causing loss to life, and property in the Middle East region, it has already ushered the worst oil crisis in history according to International Energy Agency (IEA), with prices rising around 40 percent since the start of the war; on March 17, Brent Crude stood a little over USD 103 per barrel.

In its March 2026 ‘Oil Market Report’ IEA raised significant alarm (and rightly so) by indicating ‘The war in the Middle East is creating the largest supply disruption in the history of the global oil market. With crude and oil product flows through the Strait of Hormuz plunging from around 20 mb/d [million barrels per day] before the war to a trickle currently, limited capacity available to bypass the crucial waterway, and storage filling up, Gulf countries have cut total oil production by at least 10 mb/d. In the absence of a rapid resumption of shipping flows, supply losses are set to increase.’

Highlighting the drastic consequence of virtual closure of the Strait of Hormuz, where before the Iran War around 20 million barrels per day reportedly passed the Strait of Hormuz, a March 17, Bloomberg published article ‘Oil rallies as Iran targets Middle East energy infrastructure’ indicated that on February 27, a day before the start of the Iran War, ‘outbound’ and ‘inbound’ traffic at the Strait of Hormuz – where outbound means vessels that go out of the Persian Gulf, while inbound indicates vessels coming into the Persian Gulf – stood at 51, and 53 vessels respectively, which saw a significant fall on February 28 – the day the war started – whereby the outbound, and inbound traffic fell to 43, and 22 vessels, respectively. By March 1, this number of vessels nosedived to 13 (outbound), and 5 (inbound), respectively, while the next day it had fallen more to 3 (outbound), and 5 (inbound), respectively, around which mark it stayed overall since then with no inbound vessels on March 4, 9, 12, and 16, while 8 outbound vessels passed the Strait of Hormuz on March 10, and 7 vessels on March 15, were the highest, and second highest number of outbound vessel traffic.

A March 17, Bloomberg published article ‘Brent oil closes above $100 a barrel for third straight session’ indicated, ‘Brent oil settled above $100 for a third straight session, the longest such streak since August 2022… Oil markets continue to feel the aftershocks of the most volatile week for the global Brent benchmark on record. …“The Hormuz closure is turning a shipping disruption into a true global supply loss as storage in the region fills and upstream shut-ins rise,” Morgan Stanley analysts including Martijn Rats and Charlotte Firkins wrote. The bank raised its forecast for the second quarter to $110 a barrel.’

The indication by IEA for making the highest stock release in history at 400 million barrels is likely bring some ease to the oil supply shock. US reportedly indicated that it will be releasing 172 million barrels, which will be part of the overall stock release announced by IEA.

The release will reportedly be in the form of a loan, as a March 15, Bloomberg published article ‘US reiterates oil reserve release spurred by Iran War will be an exchange’ pointed out, ‘The US Energy Department reiterated Sunday that a planned 172-million-barrel release of oil from the country’s Strategic Petroleum Reserve would be structured as an exchange. The agency gave more details on the release Friday, clarifying it would begin with an exchange – essentially a loan that companies must eventually return with interest – of 86 million barrels. The oil is expected to begin moving to market this coming week.’

This has already had led to a drastic increase in prices of petroleum products – Rs. 55 per liter increase announced for petrol, and diesel respectively, but not without sharp criticism over the need to raise by so much given oil stocks being supplied from were bought at significantly lower before-Iran War oil prices.

In response, while no oil subsidy has been announced yet, a set of non-development expenditure reduction measures is being implemented to mainly curtail oil usage, but to also create fiscal space by, for instance, temporarily reducing salaries in the overall public sector domain.

A March 10, ‘Aljazeera’ published article ‘Pakistan orders sweeping austerity measures as Iran war triggers oil crisis’ pointed out in this regard, ‘“The entire region is currently in a state of war,” Sharif said as he laid out a series of steps, including moving to a four-day workweek for government employees and spring holidays for schools from March 16 to the end of the month.

Sharif said 50 percent of government staff will work from home on a rotating basis and recommended similar arrangements for the private sector, giving key sectors such as banking an exemption. …The austerity measures also include the federal and provincial cabinet members forgoing their salaries and allowances for the next two months, while salaries of the members of federal and provincial legislatures will see a 25 percent cut during the period.’

Here, it needs to be mentioned that the usage of austerity here is in the sense of expenditure rationalization, while in the rest of the article it is used an economic terminology, which points towards aggregate demand squeeze policies, and mainly comes from raising policy rate (monetary austerity), and/or adopting fiscal consolidation policies (fiscal austerity).

Although, all are important steps in the face of a huge challenge at hand, especially in view of years of practice of austerity, and pro-cyclical polices already taking a heavy toll on economic growth, the announced policies are quite minimal in terms of their impact.

In fact, they miss the two elephants in the room in terms of high interest payments generated by (wrongly) over-board practice of monetary austerity policy, and along with high tax rates, and low development/resilience-related spending leading to a serious lack of not just economic growth, but diminishing inclusivity levels, and rising poverty.

Low growth rate, in turn, has resulted in poor domestic resource mobilization. So, fiscal and foreign exchange savings of the announced measures are far less than the lack of tax collection, and foreign exchange earnings from lower exports. This, in turn, requires that government moves away from the underlying economic policy philosophy, moving away from austerity – as used in economics literature – policies to non-austerity policies, and from a pro-cyclical policy stance to counter-cyclical policy approach.

A March 15, Bloomberg published article ‘That 70s Show is getting an oil spike return’ called such measures ‘a short holding pattern’, and called for deeper steps whereby ‘What is needed are hard decisions on budgets and interest rates.’ The article pointed out in this regard ‘We have been here before.

In the 1970s, President Gerald Ford urged Americans to combat escalating energy costs in response to the Arab-Israeli war. His Whip Inflation Now initiative encouraged people to grow vegetables in their yards, car pool, and use cold water in the laundry. …The exercise was more public relations than serious policy. But half a century on, Asian leaders are asking people to again adapt their habits as oil and gas prices jump due to conflict in the Middle East: Work in short sleeves, ease up on the air conditioning, skip the elevator, they are advised.

Now as then, the measures aren’t a substitute for effective monetary or fiscal practices. They represent a short holding pattern, at most. Cutting back is one of the first things human beings can control. But their role will be a minor one if the current conflict, which began with an attack on Iran by Israel and the US, is prolonged.’

Moreover, with regard to specific policy direction, the same article indicated, ‘Central banks, nevertheless, need to call this moment correctly. A slew of officials meet this week, including the Federal Reserve, the European Central Bank and the Bank of Japan.

At this early stage, expressing an absolute commitment to containing inflation should suffice. Actions can follow — if required. Panic, alarmism, and a response that strikes investors as knee-jerk have no place. …Central banks and finance ministers need more than gimmicks.

Even if all things must pass, substance has rarely mattered more.’ Reforms of ‘substance’ will indeed help provide the support needed in not just in this crisis, but in creating greater resilience in a world of polycrisis; not to mention the need anyways to put the economy on sustainable macroeconomic stability, and economic growth.

Hence, the government, while overall has to revise its policy direction, especially from the misgivings of these policies in the wake of a similar supply-sided shock in the wake of Covid-19 pandemic, and the Ukraine War, it will also need to be more creative in terms of design of policy formulation, and implementation space.

For instance, an ‘economic crisis estimation wing’ (ECEW) should be established at the ministry of finance (MoF) at the earliest, which should build data for multiple scenarios within the overall main threats of conflict, and climate change-induced catastrophes such as flood, smog, and epidemic/pandemic outbreak. For obvious reason of the Iran war, ECEW should currently focus on the conflict-related risks, but should expand to all risks – like mentioned above – and provide input for planning accordingly.

Here, wide-based information coverage should have a committee feeding information in greater scope to ECEW, in the shape of formation of an ‘inter-ministerial risks estimation committee’ (IMREC), which is a group of all concerned ministries related to crises, like environment, health, education, and provincial level finance, planning, and tax authorities.

Moreover, under the overall mechanism of fiscal-monetary coordination, the government should immediately form a ‘trilateral special committee’ for overall economic crisis estimation, and policy response. Here, the three sides of the committee will comprise MoF, State Bank of Pakistan, and ministry of planning and special initiatives.

ECEW, along with the two committees, should process and disseminate fiscal, and monetary policy response - for instance, tax- and subsidy-related policy - as needed signal for economic exchange, and for input into budget response.

In addition, the IMF should be taken on board in this regard, and the pending reforms like expanding the tax base, reforming the energy sector to have lesser needs for fiscal bailouts, and targeted administrative measures to rationalize non-oil imports, as alternative steps to help minimize risks with regard to the twin deficits.

Here, the importance of growth, its greater inclusivity, and enhancing resilience need to be emphasized by policymakers, both in-house, and to the IMF, and mainly in the sense that fiscal, and gross financing requirements are met through fixing the supply side in a targeted, and purpose-driven way – which, in turn, requires adopting non-neoliberal policies – rather than creating greater distress in the economy by continuing with aggregate demand squeeze policies that may ultimately do more harm to revenues, and foreign exchange earnings at the back of diminishing growth, and exports – not to mention that already poverty, and income inequality have significantly increased in recent years – than any macroeconomic stability that pro-cyclical, and austerity policies bring.

Last but not the least, the government should take it up with IMF that the deep oil price shock needs intervention from the IMF in the shape of immediate and meaningful release of special drawing rights (SDRs) as were released in August 2021 to deal with the recessionary impact of Covid-19 pandemic, but this time not repeating the mistake of making the allocations on the routine basis of ‘quota’-based criterion, but instead such allocations are made on needs basis of a particular country.

Copyright Business Recorder, 2026