The ongoing war imposed on Iran by Israel, with the United States firmly aligned behind Benjamin Netanyahu, is not merely a geopolitical estrangement. It is a macroeconomic shock unfolding in real time.
Wars in the Middle East rarely remain confined to the battlefield. They transmit rapidly through oil markets, capital flows, exchange rates and inflation expectations. For fragile economies such as Pakistan’s, the economic consequences are immediate and potentially severe.
Energy markets react not only to actual supply disruptions but also to perceived risk. The Strait of Hormuz, a narrow maritime conduit through which nearly one-fifth of global crude oil flows, has seen heightened tension. Even without physical interruption, this risk premium pushes benchmark crude prices, such as Brent, upward by immediate market repricing. Historically, a US$10–US$15 per barrel rise in oil prices is sufficient to materially alter macroeconomic projections for energy-importing economies.
Pakistan’s energy import profile exposes structural vulnerability. The country imports close to three-quarters of its total energy requirements, with petroleum products alone are accounting for up to US$17 billion in annual imports in recent years. A sustained upward movement in crude prices would widen the import bill significantly, exacerbating an external deficit that has only recently narrowed due to import compression rather than export growth.
A higher oil price environment would add billions of dollars to the energy import bill, directly weakening the current account balance and applying pressure on foreign exchange reserves that already remain modest relative to the country’s external financing needs.
The Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) have long emphasised the tight link between oil prices and current account sustainability in emerging markets.
In Pakistan’s case, a wider deficit increases vulnerability to external shocks and limits policy flexibility. A depreciating rupee, often the first victim of external stress, raises the local currency cost of servicing foreign debt—which remains above US$125 billion—and further accelerates inflation through higher import prices.
The policy challenge is stark and ongoing. Before the war premium even fully materialises, the Government of Pakistan has already signalled that recent fuel price surges will be absorbed by consumers rather than taxpayers.
An official statement cited in the Press, says, “pricing implications arising from international market movements, where unavoidable, will be addressed through established mechanisms in a predictable and orderly manner to avoid distortions or abrupt adjustments”, noting that recent petrol and diesel increases were passed on without subsidy.
This decision underscores an unavoidable truth: in an energy-import-dependent economy, the costs of global volatility are not easily quarantined. Passing higher fuel prices directly to consumers means that domestic inflationary pressures would certainly rise.
Energy is a foundational input into transport, agriculture, manufacturing and household consumption. When fuel prices climb, these costs transmit throughout the economy. Even before geopolitical shocks, Pakistan’s inflation experiences have been sensitive to energy movements.
Gas price surges in recent fiscal cycles were projected to drive headline inflation close to 25 percent, illustrating the powerful transmission mechanism from energy pricing to consumer prices.
The social ramifications of such inflation are significant.
For ordinary households, rising food and transport costs erode real incomes and reduce purchasing power. For small and medium enterprises, energy cost surges squeeze margins and deter investment.
Export-oriented industries such as textile—which contribute nearly 60 percent of foreign exchange earnings—become less competitive when production costs rise faster than in rival export sectors.
Financial markets respond immediately to such shocks. The KSE-100 index experienced a nearly 10 percent fall in a single session, triggering circuit breakers and reflecting a sharp repricing of geopolitical risk by investors.
Equity markets are forward-looking; they factor in expected economic weakness, inflationary pressure and currency risk. Capital flight from riskier assets to safer havens, typically dollar-denominated assets, strengthens the US dollar and weakens the rupee further, deepening external vulnerabilities.
The implications for monetary policy are equally challenging. A rise in inflation expectations complicates the task of central bankers attempting to balance inflation control with growth objectives. If inflation driven by imported energy costs rises further, the State Bank of Pakistan may find itself under pressure to maintain elevated policy rates, slowing domestic credit growth and dampening economic activity.
Beyond energy, global financial conditions are tightening in response to geopolitical risk. Higher oil prices can lead to delayed interest rate cuts in advanced economies, stronger dollar dynamics and tighter liquidity conditions for emerging markets. For countries like Pakistan, where access to international capital markets is already expensive, tighter global financial conditions increase the cost of borrowing and reduce access to new financing.
Wars also act as hidden global taxes. They redistribute wealth through higher food and energy costs, increased defence spending in importing countries, and higher insurance and freight costs for trade flows.
Energy-importing developing economies pay a disproportionate share of this “war tax”. Historical data from periods of geopolitical instability—such as the 1973 oil embargo and the 1990 Gulf War —consistently show spikes in energy prices followed by a drag on global growth.
Beyond direct economic indicators, regional proximity adds another layer of complexity for Pakistan. Sharing a border with Iran, even indirect escalation raises risk perception and impacts cross-border trade channels. Security-related expenditure may increase, diverting scarce fiscal resources from development priorities. Informal trade flows may expand as formal channels tighten, reducing tariff revenue. Investor confidence, already fragile, can deteriorate more quickly in economies perceived to be close to geopolitical hotspots.
Policy responses must therefore be strategic and structural rather than reactive. Pakistan cannot influence geopolitical outcomes in the Middle East, but it can reduce its exposure to external shocks. Energy diversification, through accelerated adoption of renewable sources, offers a pathway to reduce dependence on imported fossil fuels. Rationalisation of energy pricing, while politically difficult, is necessary to reflect true supply costs and insulate the economy from global price volatility.
Export competitiveness must be strengthened through structural reforms that reduce production costs and improve product quality. Fiscal discipline remains essential, but it must be balanced with targeted social protection to shield vulnerable populations from inevitable inflationary spillovers. Foreign exchange buffers must be strengthened through prudent external borrowing and expanded remittance facilitation, reducing reliance on short-term and high-cost financing.
The broader international economic context also matters. Global trade fragmentation, accelerated by sanctions and geopolitical fault lines, increases the cost of doing business across borders. Pakistan’s export sectors are particularly sensitive to such fragmentation due to their integration into global value chains.
Higher compliance costs, non-tariff barriers and logistical delays increase the cost of exports and reduce competitiveness. If the current conflict normalises into prolonged volatility, the war premium embedded in energy markets could persist. Extended uncertainty would make macroeconomic stabilisation significantly more difficult. In advanced economies, persistent price volatility may merely slow down growth. In countries like Pakistan, it could trigger broader imbalances, widen deficits, and stoke social hardship.
Economic distance offers no immunity. Oil prices, exchange rate dynamics and capital flows transmit shocks globally. For Pakistan that is already operating under tight fiscal and external margins, the present conflict is a harsh stress test. War mania, in the end, does not remain confined to military theatres; it travels through oil invoices, financial markets and household budgets. The cost is global. The vulnerability is local.
Copyright Business Recorder, 2026
The writer is a lawyer and author, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE)
The writer, an Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws
The writer is a corporate lawyer based in the US with extensive expertise in financial regulations, including Virtual Asset Service Providers (VASPs), corporate governance, and global economic policies. He holds an LLM from Washington University in St. Louis and has completed the Management Development Program at the Wharton School. He has developed regulatory frameworks for North American and South American Financial Institutions and has consulted and trained bureaucrats of different regions. He can be reached at abdulrauff@hotmail.com