ISLAMABAD: An economic slowdown, declining exports, and rising inflation are likely outcomes of the ongoing confrontation between the US-Israel bloc and Iran. However, once the conflict subsides, reconstruction activities in Gulf Cooperation Council (GCC) countries could open significant employment and export opportunities for Pakistani manpower and businesses, economic experts believe.
The Pakistan Institute of Development Economics (PIDE) organized a webinar on the topic “War Economics: Trade Disruptions, Oil Volatility, and Pakistan’s Policy Response.”
Speaking on the occasion, Dr. Syed Hasanat Shah, Professor at PIDE, said that the ongoing confrontation in the Middle East has evolved from a regional political dispute into a global economic crisis. He noted that the conflict has destabilized the region, disrupting Pakistan’s direct and indirect trade with GCC countries and other regions.
He warned that the crisis poses a serious threat to Pakistan’s external sector and could potentially reduce the country’s direct exports to GCC countries by USD1.5 to USD2 billion, depending on the status of the Strait of Hormuz. Meanwhile, Pakistan’s imports from GCC countries—primarily energy—could decline by around USD3 billion, a development that could destabilize domestic production and affect export performance.
At the same time, rising energy prices are expected to increase Pakistan’s import bill by approximately USD4.5 billion, widening the current account deficit and adding to external debt pressures.
Dr. Hasanat further observed that the crisis could worsen Pakistan’s balance of payments position by reducing export earnings and remittance inflows, potentially putting the country’s foreign exchange reserves under unsustainable pressure.
Furthermore, he added that the border trade situation with neighbouring countries is already strained, and the ongoing war in the Middle East is likely to further reduce Pakistan’s border trade with Iran. Higher oil prices could also lead to a return of double-digit inflation, reversing the stabilization achieved during FY2025.
To mitigate these risks and ensure a stable energy supply, he suggested that Pakistan should reroute oil imports to Yanbu Port in the Red Sea. He also emphasized the need to diversify oil import sources and leverage CPEC 2.0 as a robust alternative trade corridor. These measures, he noted, are essential to absorb external shocks. The current crisis, he added, serves as a test case for producers in a rapidly changing global landscape, where survival will increasingly depend on competitiveness, innovation, and efficiency rather than external support.
Dr. Nasir Iqbal, Professor at PIDE, said in his presentation that the closure of the Strait of Hormuz would choke nearly 20 percent of global energy supply, along with a significant portion of merchandise trade. He noted that Pakistan’s trade heavily relies on the Middle East; therefore, any closure of the Strait would bring exports to GCC countries to a standstill, while imports—especially oil and LNG—would decline sharply.
He further stated that the current oil price shock could have serious implications for the Government of Pakistan’s fiscal consolidation efforts. The federal primary surplus, budgeted at PKR 1,706 billion (1.3 percent of GDP), would decline significantly under different fiscal risk scenarios. Under a moderate shock (USD100 per barrel), it would fall to PKR 1,002 billion (0.7 percent of GDP), a reduction of PKR 704 billion (-0.6 percentage points). In a severe shock (USD120 per barrel), it would drop to PKR 821 billion (0.6 percent of GDP), a decrease of PKR 885 billion (-0.7 percentage points). In an extreme scenario (USD144 per barrel), it would further decline to PKR 781 billion (0.6 percent of GDP), a reduction of PKR 925 billion (-0.7 percentage points). Meanwhile, the fiscal deficit would widen from PKR 6,501 billion (5.0 percent of GDP) to PKR 7,517 billion (5.8 percent of GDP), reflecting mounting fiscal stress.
He explained that rising oil prices increase the import bill, intensify inflationary pressures, and exert downward pressure on the exchange rate, thereby slowing economic activity. A prolonged closure of the Strait of Hormuz could further raise industrial input costs and weaken business confidence. Additionally, higher energy prices may widen the trade deficit and strain external financing needs. They also reduce fiscal space while increasing subsidy pressures; any reduction in the petroleum levy could further undermine fiscal consolidation efforts. Consequently, these factors could significantly increase the fiscal deficit and weaken the primary balance. In this context, the primary balance serves as a critical indicator for assessing whether Pakistan can absorb an external oil shock without jeopardizing macroeconomic stability.
He also noted that Pakistan’s diplomatic efforts to de-escalate the ongoing conflict have been appreciated by the international community, particularly GCC countries. He expressed the view that once reconstruction begins in the Middle East, the government would seek to ensure preferential opportunities for Pakistani manpower and exports.
Dr. Ahsan Ul Haq, Associate Professor at PIDE, highlighted in his presentation that oil price shocks remain among the most significant external disturbances, affecting domestic inflation, production costs, and external sector stability in oil-importing economies.
He pointed out that Pakistan’s exposure to such shocks is structural rather than temporary. The country’s total energy import bill stood at USD15.9 billion in FY2025, including USD5.96 billion for petroleum products, USD5.45 billion for crude oil, USD3.48 billion for LNG, and approximately USD1.06 billion for LPG (State Bank of Pakistan, 2025). Imported energy, therefore, remains deeply embedded in Pakistan’s external account. Even when international prices temporarily decline, the economy remains vulnerable to renewed external shocks.
He further explained that petroleum pricing is particularly sensitive, as petroleum products are central to transport, industrial production, and fiscal management, while import dependence exposes domestic prices to global volatility. In practical terms, this means that an external oil shock does not remain confined to the energy sector; it quickly translates into inflationary pressures, balance-of-payments stress, and broader policy management challenges.
Copyright Business Recorder, 2026