As a pleasant breath of fresh air into the corridors of economic policymaking, and which should serve as a major cue for both extended fund facility (EFF) programme and upcoming Federal Budget-related discussions, is indication by Asian Development Bank (ADB) to provide counter-cyclical natured financial support.
In a March 24 published news release ‘ADB announces financial support package to help Asia and Pacific mitigate impacts from Middle East conflict’ by ADB, it pointed out in this regard, ‘The Asian Development Bank (ADB) today announced a financial support package to help its developing member countries (DMCs) mitigate the economic and financial impacts resulting from the conflict in the Middle East. “
ADB will deliver rapid, flexible, and scalable assistance to help countries manage immediate pressures and strengthen long-term resilience, notably fast-disbursing budget support and trade and supply chain finance to secure the import of essential goods, now including oil,” said ADB President Masato Kanda. …There are two main components to ADB’s intervention. The first is fast-disbursing budget support to help DMCs facing heightened fiscal pressures, notably the use of the bank’s Countercyclical Support Facility to help governments stabilize their economies and mitigate the impact of shocks on the lives and livelihoods of those most at risk. The second is ADB’s Trade and Supply Chain Finance Program (TSCFP), which supports the private sector to ensure critical imports, including energy and food, continue to flow.’
The ongoing Middle East conflict, especially in terms of the closure of the Strait of Hormuz that has resulted in a deep level of uncertainty that this otherwise narrow passage has caused in terms of immense negative impact of global economy.
The highly significant adverse impact, therefore, calls for not only individual governments adopting deeply creative, and mission-oriented economic policy response, but also emphasizes upon International Monetary Fund (IMF), and World Bank, along with ‘Chicago boys’-styled domestic policymakers to adopt meaningful revisionist economic policy, shifting, in turn, away from the neoclassical philosophical basis of policy.
Moreover, it is quite surprising that although the Middle East conflict has had apparently a very profound impact on global economy, especially for net oil importers, yet in a message that came on March 3, and titled ‘IMF statement on the Middle East’ – while apparently no further statement has come out publicly since then – it pointed out in a rather lacklustre way, for instance, ‘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.’
Although an article ‘How the war in the Middle East is affecting energy, trade, and finance’ has been published by IMF on March 30 – almost after a month after release of its statement indicated above – and highlights the main economic happenings over the last month or so, yet there is only a general-natured comment of IMF providing guidance to countries, with no ‘specific’ policy intervention that IMF will likely make to deal with the crisis; for instance, calling an emergency meeting to arrange enhanced allocation of special drawing rights (SDRs) on needs basis for countries, and for meaningfully improving the global sovereign debt restructuring framework as important and precise policy interventions, and financial support. IMF’s attitude is almost a dangerously casual approach of wait-and- see, when so much of significance in terms of serious economic impact has already happened.
Similarly, World Bank has only come out with a statement ‘World Bank Group statement on the conflict in the Middle East’ almost a month later since the start of the Iran War, and that too quite general in terms of surveying important economic happenings over the course of the conflict yet and, in turn, not providing any specific policy intervention, and financial support it envisages; for instance, in terms of budgetary support for net oil importing countries for oil subsidy, and overall social protection needs.
The cracks coming so visibly to the fore during the Covid-19 pandemic have only gotten widened over almost half-a-decade later.
One glaring message coming out of the current Middle East conflict is that the delay in moving away from fossil fuel usage is not a choice anymore, especially for net oil importing countries like Pakistan.
The new elevated levels of oil- based external shock that has come through, in particular in terms of wild swings in oil prices, and a sharp rise to start with, is nothing short of a watershed moment, requiring a mission-oriented economic policy response.
Not only this is true in general globally but in particular for developing countries, like Pakistan, which are not only highly vulnerable to oil import payments in terms of both balance of payments vulnerability and debt distress that such shock holds the potential of producing, but also given the country being extremely climate change vulnerable, and requiring a swift shift anyways, given the catastrophic flooding that the country has gone through twice in recent years.
Here, it is important to be cognizant of the extent of the oil price shock in terms of the deep gravity that it can likely reach, as was highlighted in a March 27, Bloomberg published article ‘Brace for USD 200 oil if was lasts until June, Macquarie warns’, which pointed out, ‘Oil may hit a record USD 200 a barrel if the Iran war drags on till June, with the Strait of Hormuz staying shut, Macquarie Group Ltd. said.
A conflict that stretches through the second quarter would result in historically high real prices, analysts including Vikas Dwivedi said in a note, outlining a scenario with odds of 40 percent. An alternative outlook, with probability of 60 percent, suggested the war may finish at the end of this month, they said. …Brent was last near USD 110 a barrel on Friday, after touching a crisis-high of USD 119.50 earlier this month. The benchmark set a nominal peak of USD 147.50 a barrel in 2008, according to data compiled by Bloomberg.’
With regard to oil price outlook, on April 1, a Bloomberg published article ‘Oil slides as traders weigh optimism over Iran War resolution’ pointed out: ‘Oil dropped after President Donald Trump again signaled the potential end to the Iran war that’s roiled markets, even as the Strait of Hormuz remains largely closed and more US troops arrived in the region. Brent crude fell to trade near USD 102 a barrel after rising as much as 1.9 percent earlier, while West Texas Intermediate was around USD 100. Trump told reporters that the US could leave Iran within two to three weeks, and indicated an agreement with Tehran may be reached but wasn’t necessary for the war to end.’
Moreover, for the country to salvage any meaningful resilience- related gain from the other IMF programme, currently undergoing in Pakistan in the shape of resilience and sustainability facility (RSF), requires a major rethink away from conflicting orientation of the EFF-, and RSF programme.
Having said that, while it is noteworthy, given the high external financing needs facing the country, that as per the March 27, ‘Press Release No. 26/095’ the country’s authorities have reached a ‘staff-level agreement’ with IMF with regard to both the EFF-, and RSF programme, whereby subject to approval by the executive board of the IMF, the country ‘will have access to about USD 1.0 billion (SDR 760 million) under the EFF and about USD 210 million (SDR 154 million) under the RSF’ yet it is unfortunate to see the deep level of ‘stickiness’ of IMF policy thinking with austerity and pro-cyclical policy mindset, which, in turn, in the specific case of impact of RSF programme significantly hinders investments needs of enhancing resilience under the RSF programme.
Hence, even in the wake of the Middle East conflict, the EFF as per the press release has continued with fiscal austerity, or fiscal consolidation by calling for ‘… efforts are ongoing to meeting the FY26 budget primary surplus of 1.6 percent of GDP and to target an underlying primary balance of 2 percent of GDP in FY27…’, and has also persisted with monetary austerity by indicating ‘Maintaining an appropriately tight and data-dependent monetary policy.
The State Bank of Pakistan (SBP) remains committed to keeping inflation within its target range and stands ready to raise interest rates should price pressures intensify or inflation expectations rise, including from pass-through of recent volatility in global food and fuel prices.’
Moreover, rather than providing enhanced allocation of SDRs to support balance of payments pressures so that exchange rate devaluations can be avoided to the most to not allow enhancement in import prices, and increase in debt distress.
On the contrary, in these exceptional times of balance of payments pressures, and even though it is quite clear that inflationary pressures build-up will most probably largely be a supply-side phenomenon, yet in addition to wrongly emphasizing monetary austerity, the press release called for ‘Exchange rate flexibility should continue to serve as the primary shock absorber, including against spillovers from the conflict in the Middle East…’
In addition, instead of providing direct budget support through making additional allocation of SDRs – in addition to enhanced allocation for balance of payments support – for use in making budgetary spending, especially when the other assertion in the press release to ‘broaden the tax base’ is more of a medium-term domestic resource mobilization measure.
Both allocations of SDRs – for balance of payments support, and budgetary support, and not to mention bringing on board World Bank and other development partners to provide greater budgetary support, especially to support energy subsidizing, and for making much-needed enhancement in fuel buffers – should have been brought to table to allow for much-needed adoption of counter-cyclical policy stance.
Such provision of counter-cyclical budgetary support, including need for SDR allocation for balance of payments support is all the more necessary given the traditional yardstick of oil price payments in the shape of Brent Crude is likely not continuing to remain a representative measure, at least during the current conflict, as other benchmarks are becoming more relevant in the face of oil supply shortages pushing countries to diversify sources of purchase, and in turn, exposing to much higher oil prices than Brent Crude.
The primary underlying reason is the virtual closure of the Strait of Hormuz, which, in turn, has meant that oil procured from North Sea sources – which represented Brent Crude prices – is not from where most supply is being procured. Therefore, it is hoped that IMF and authorities will more transparently communicate, and before that internalize in EFF programme calculations, oil pricing- related balance of payments realities in the possible situation of such diversification of oil procurement.
A March 27 Bloomberg published article ‘Vital oil price benchmarks bent out of shape by Iran War’ pointed out in this regard: ‘Asia’s oil refiners are seeking alternatives to the Middle East’s benchmark crude prices, as war-driven distortions fuel wild price swings that they say have come untethered from physical market realities. The Middle East’s key benchmarks have become increasingly erratic as the war creates a shortage of the barrels used to assess prices for the region, while a buying spree by France’s TotalEnergies SE has added to the turmoil. At one point, Oman crude traded close to USD 170 a barrel, prompting concerns in Wall Street that the oil shortage was in reality worse than it looked – before prices crashed back down again. Refiners in Asia, which use the Oman and Dubai benchmarks as a reference level for the purchase of billions of dollars of Middle East crude each month, are now struggling to navigate a pricing system many view as broken.’
Moreover, the article indicated, ‘While much of the region’s production is shut inside of the Strait of Hormuz, the benchmarks are still needed to value the roughly 5 million barrels a day of oil that continues to flow from Saudi Arabia and the United Arab Emirates via pipelines to outside the Gulf. Speaking privately, about 20 traders and officials from refiners across the world’s biggest oil-consuming region said they no longer view the Middle East’s key price benchmarks as reliable, exacerbated by a lack of liquidity. Several said they were concerned that the system may take time to return to normal even after the conflict ends. …The situation has already led to millions of barrels of spot trades that would normally have Dubai as their baseline to be being transacted relative to Brent instead. Some fuel-makers in Asia have also taken the unusual step of asking Saudi Arabia to change the pricing basis of its monthly crude sales – basing them off Brent futures instead.’
Not adopting pro-cyclical is, indeed, very important, given the country has already gone through deep fiscal consolidation, and acute practice of monetary austerity resulting in sub-optimal growth, and sharply rising income inequality, and poverty levels over the medium term. Further breaking of aggregate demand, and not involving in creating any meaningful momentum for supporting growth, enhancing employment, increasing exports and, in turn, creating more positive circumstances for filling the otherwise yawning gap of external financing, increasing revenues, and boosting foreign exchange reserves. Not doing that will likely keep the assertion of ‘…expanding health, education, and social protection spending…’ to nothing more than mostly a hollow statement of mainly psychological value, and no tangible steps being followed.
Having said that, the authorities being the taker of this negotiated programme are equally to blame for not putting in place – at least not shared in public – a much more ‘ambitious’ and creative fiscal, and monetary policy, and apparently tagged along with such a deep ‘austerity’ plan. In addition, it is high time that the wider parliamentary committees overseeing economic matters come up with an alternate set of suggestions as a significant effort to fill this ‘ambition’ gap, especially in terms of formulating, and pursuing mission-oriented, purpose-drive reform to enhance exports, improve supply chains, creating energy buffers, supporting farmers and industry in the wake of fast-building energy and fertilizer supply and pricing pressures; and as things stand, there is strong likelihood of a difficult outlook for these sectors in particular over many months even if the Middle East conflict stopped today.
Here, one meaningful way to show ‘ambition’ is for government to make a fundamental shift from taxing consumption to taxing income, whereby it should come up in the Federal Budget deep tax broadening measures, while making taxation much more progressive, and reducing currently high tax rates, especially on salaried-, and corporate income. The cushion such ambitious policies create should be matched by significantly transition away from consumption taxes, in particular applied on oil products. Hence, it would make sense to remove indirect tax in the shape of general sales tax (GST), and also petroleum levy on petroleum products. At the same time, oil supply consumption rationing requirement is achieved through IT-based controls on the lines as are being reportedly planned by government currently.
Moreover, any fiscal cushion available should then also be made available in providing as much targeted subsidy on oil as the economic institutional capacity can deliver; while, otherwise, a broad-based subsidy is provided if such capacity is significantly not there. Any meaningful provision of enhanced SDR allocation by IMF will indeed help in much- needed initiation, and augmentation of non-austerity, counter-cyclical policies. Such policies are important for putting in place macroeconomic stability, and economic growth on sustainable grounds, given it will help bring ease to aggregate supply, and inflationary pressures coming through that channel.
Hence, it is important that EFF programme, and upcoming Federal Budget should work on being creative – enhanced SDR allocation, tax policy formulation for quick-paced broad-basing, for instance – and more mindful of the need of a counter-cyclical and non-austerity policy response. This is important for somewhat dulling the impact of build-up of interest repayment needs – given the country already faces high medium-term gross external financing requirements – and the negative impact it will likely produce on foreign exchange reserve, and exchange rate and, in turn, on imported inflation. Here, it needs to be emphasized that instead of cutting development expenditure, fiscal space for providing oil subsidy, for instance, should come from policy directions indicated above, including primarily in terms of practicing deep non-development expenditure rationalisation.
Copyright Business Recorder, 2026
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7
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