The war in the Middle East started on the 26th of February, 2026, with coordinated attacks by United States and Israel on various sites in Iran. The attacks included the assassination of the supreme leader of Iran, Ayatollah Syed Ali Khamenei.
In retaliation, Iran has launched dozens of its drones and missiles throughout the Gulf and beyond. These include attacks on targets in Israel, on US military bases in Saudi Arabia, Kuwait, Qatar, Iraq, Bahrain and the United Arab Emirates and on airports and shipping ports.
Iran has also closed the Strait of Hormuz, disrupting global oil and gas shipments. This has stopped the flow of over one-fifth of the oil consumed globally as well as large quantities of LNG gas.
The global impact of this war is likely to be substantial. It includes, first, a quantum jump in petrol and diesel prices for consumers globally. Second, there will also be a big increase in gas prices and a cutback in fertilizer and other production based on LNG. Third, there will be a doubling or more of freight insurance costs and shipping costs.
Fourth, the only real beneficiaries will be producers and exporters outside the Middle East of oil and gas. Interestingly, this will include countries like Russia and the USA, who are major oil exporters, whose supplies could move on alternate routes and receive much higher prices. The USA will also receive higher prices as the world’s top exporter of LNG.
Turning to Pakistan, we have already experienced the effects of a war after the commencement of the war between Russia and Ukraine in February 2022.
The crude oil import price almost doubled to USD 116 per barrel in the first six months after the commencement of the war. This led to multiple impacts on the Pakistan economy.
First, the oil import bill went up from USD 11.4 billion in 2020-21 to USD 23.3 billion in 2021-22. The result was a quantum jump in the current account deficit by USD 14.7 billion. This led to a big fall in foreign exchange reserves from USD 18.7 billion in June 2021 to USD 11.1 billion by June 2022, and was the precursor of the move towards default in 2022-23. This was fortunately averted by the emergency Stand-By Facility of the IMF. Inevitably, the currency depreciated and by as much as 40 percent.
The rise in oil prices domestically was the highest ever. The price of motor spirit went up from Rs 106 per litre in the beginning of 2021 to over Rs 233 per litre by the middle of 2022. Similarly, the price of HSD oil jumped up from Rs 110 per litre to over Rs 263 per litre. This was one of the major reasons for the subsequent big jump in the rate of inflation to almost 30 percent in 2022-23.
The situation in the first seven days after the commencement of the war in the Middle East is a quantum jump in the global price of crude oil from USD 65 per barrel to almost USD 93 per barrel, an increase already of 43 percent. Supplies of oil and LNG to importing countries like Pakistan are likely to remain disrupted as long as the Strait of Hormuz remains closed. For every USD 10 increase in oil price, the import bill of Pakistan rises by almost USD 2 billion. Other imports will also become more expensive due to the rise in transport costs.
Pakistan is likely to face some more negative impacts. These include the likelihood of a decline in home remittances from the Middle East as the disruption in the economies in the region could lead to displacement of workers from other countries, like India and Pakistan.
The largest source of remittances of USD 9.3 billion in 2024-25 was Saudi Arabia. Remittances from the UAE are also large at USD 7.8 billion, while that from GCC countries aggregate to USD 3.7 billion. Overall, remittances from the Middle East to Pakistan are almost 55 percent of total remittances.
There is a clear risk that the balance of payments of Pakistan will be impacted significantly, especially by the rise in oil imports and fall in remittances. The magnitude may be as large as USD 6 to USD 8 billion by the end of 2025-26. Consequently, there may be a significant decline of up to 40 percent in the foreign exchange reserves by the end of June 2026. This will inevitably put pressure on the value of the rupee.
The rate of inflation was already beginning to rise in Pakistan. It stands now at close to 7 percent. The government has announced on the 7th of March a big increase in price of HSD oil from Rs300.86 to Rs355.86 and of petrol from Rs266.17 to Rs321.17, an increase in price of both products by Rs55 per litre.
This quantum jump in prices of POL products will have a direct impact on household transport costs as well as an indirect impact on other goods due to rise in their transport costs and in input costs. The overall impact on the rate of inflation of this one big move is likely to be sizeable. It could lead to the year-to-year rate of inflation rising to near 11 percent from 7 percent in February.
The government should have staggered the price increase. It has conferred a large windfall gain to existing stock holders. Also, there are substantial tax revenues beyond the petroleum levy from the sales tax and customs duty of over Rs 750 billion. These are ad valorem taxes and will yield significantly more revenues following the rise in import prices. The rates of petroleum levy could have been adjusted downwards in the presence of higher tax revenues from POL products.
There will also be a negative impact on the GDP growth rate with a significant contraction in the large transport sector. The output of fertilizer, cement and textiles will also be reduced by the shortage of LNG.
There is the on-going process of the third review of the IMF Extended Fund Facility and the Resilience Facility. Clearly, the macroeconomic projections and targets will need to be changed at least for 2025-26 and 2026-27 to reflect the ongoing and rising negative impact of the war in the Middle East.
The federal government has already identified various measures to reduce the negative impact especially of rising oil prices and declining supplies. A policy decision has been taken of weekly pricing of POL products from March 7 onwards.
There are also proposals for reducing the demand for motor spirit by increased distance learning, work-from-home and car pooling. There will also be need for rationing of gas supplies to thermal plants, fertilizers and cement industries, as well as to captive producers of energy. Strong measures must be adopted to prevent black marketing by retail POL outlets.
In conclusion, Pakistan has been through multiple crises since 2019-20. There has been a big rise in the rate of unemployment, fall in real incomes and a quantum jump in the incidence of poverty since then. The emerging crisis due to the war in the Middle East will lead to a further worsening in the living standards of the people.
The evolving situation will have to be managed skilfully by both the government agencies and the private sector. Efforts must be made for economy especially in spending on transport and other expenditure and for managing the inflationary pressures.
Copyright Business Recorder, 2026
The writer is Professor Emeritus at BNU and former Federal Minister