Once again, Pakistan’s economic vulnerabilities are exposed. The country does not have ample petroleum reserves, while foreign exchange reserves are too thin to withstand even a couple of months of supply chain disruption in the Middle East due to the ongoing war.
Pakistan heavily depends on the Middle East, as its large diaspora is employed there and sends roughly half of the country’s home remittances (about 5 percent of GDP). The country is also almost completely reliant on oil and gas supplies from the region, which are now significantly curtailed. A prolonged shock can jolt the economic fundamentals badly. The twin deficits (fiscal and current account) may grow, resulting in currency slippage and a rise in interest rates.
The story of global oil is that supply has been cut by 15 to 20 percent, fueling crude oil, gas, and petroleum product prices. The price increase is substantially higher for the region in conflict compared to prices in other areas. This is putting greater economic pressure on countries, including Pakistan, that import from the Middle East.
For example, Pakistan’s crude oil imports are benchmarked to Dubai Crude, which was priced at $145 per barrel on Friday, compared to Brent trading at $103 per barrel at the same time. A similar delta applies to petrol (mogas) and diesel (gasoil) pricing. The shortages are more acute in diesel, as its price rose sharply to $186 per barrel.
Luckily, Pakistan imports only one-fourth of its diesel, as most of it is produced by local refineries. However, around 80 percent of crude oil is imported to refine into diesel and other products. In addition, about 70 percent of petrol is imported. Overall, Pakistan is still securing crude and petrol imports, but at extremely elevated prices.
The government has little option but to pass on the impact to consumers. In the first jolt, petrol and diesel prices were increased by Rs 55 per liter. In the second week, the government abstained, even though an average increase of around Rs 60 per liter was due. For now, the government is absorbing the cost, but the impact may be passed on next week. If the crisis continues and the Strait of Hormuz remains closed, a new wave of inflation should be expected.
Apart from that, diesel supply may become constrained if the crisis continues until mid-April. The harvesting peak season is approaching, and import demand will be higher than normal. This could affect overall goods movement within the country, as most cargo is transported upcountry by trucks.
Had the country maintained strategic petroleum reserves, the situation would have been easier to manage. Unfortunately, Pakistan has none. At best, the country has about three to four weeks of commercial reserves. As a result, imports must continue at peak prices to ensure supply. Another challenge is that the central bank’s foreign exchange reserves barely cover three months of imports.
A $1.2 billion Eurobond payment is due next month. There is also uncertainty regarding the rollover of the UAE’s $2 billion deposits. Securing fresh commercial loans in the current environment will be difficult. Meanwhile, the import bill may soar because of the sharp rise in oil and oil-derivative prices, including petrochemicals. For the moment, there is some relief from the absence of RLNG imports, but that could result in load-shedding in Punjab during April.
Another risk is a slowdown in inward remittances. Construction activity in the Middle East has slowed, tourism is declining, and restaurants are seeing fewer customers. Taxi drivers and other service workers are earning less. Many jobs are already seeing reduced income flows, and within a few weeks this may begin to show up in remittance data.
Exporters are also facing higher freight and insurance costs. Overall, pressure is building on the balance of payments. This should eventually be reflected in the currency if the exchange rate is allowed to adjust freely. The risks are already being priced into interest rates, which have increased by roughly 100 to 150 basis points since December.
Inflation is almost certain to rise, as the pass-through from higher oil prices will spread across the entire economy. If the increase is not fully passed on, fiscal slippage will follow, and inflation will appear with a lag.
The situation is tight. Pakistan lacks the buffers needed to face economic headwinds for several months if the war continues. The external financing profile is already fragile, which will increase anxiety in financial markets. The government may impose further austerity measures, and the State Bank could restart so-called non-essential import rationing, targeting items such as cars, phones, and machinery. Taxes on these goods may also rise. Overall, the fragile economic momentum could stall.
Let us hope the war concludes within a couple of weeks. Otherwise, tighten your seatbelts and prepare for another economic rollercoaster.
Copyright Business Recorder, 2026
Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar