A recent very useful presentation by the Policy Research Institute of Market Economy (PRIME) to the National Assembly Standing Committee on Finance has quantified the costs to Pakistan of the Middle East War. The media have also highlighted the estimated costs.
Three different scenarios have been identified. The first scenario is where the war has effectively come to an end and the Strait of Hormuz will be opened shortly.
The second scenario is when the war continues for another three months. The third scenario is of a longer period of closure of the Strait of Hormuz leading to a rise in the price of crude oil to USD 150 per barrel.
The costs that have been quantified include the rise in the oil import bill, fall in remittances and the fall in exports.
Accordingly, the estimated cost to the economy of Pakistan is already USD 10 billion, rising to between USD 24 billion and USD 32 billion in the second scenario and to a colossal USD 50 billion to USD 68 billion in the third scenario of a severe longer shock with a quantum jump in the price of oil.
The negative impact is equivalent to 2.5 percent of the GDP in the first scenario which goes up to 8 percent of the GDP in the second scenario and to a very large 17 percent of the GDP in the third scenario.
The methodology adopted focuses primarily on the external balance of payments of Pakistan and quantifies the likely impact on imports, exports, and remittances. The costs will have a quantum negative impact on the balance of payments and lead to a big fall in the foreign exchange reserves. This will precipitate a financial crisis even in the presence of a functional IMF programme.
As such, there is a limit on the size of the current account deficit, which cannot exceed the level of foreign exchange reserves, in the presence of small net inflow into the financial account and some IMF funding.
The estimate of the likely rate of inflation is 10 percent in the first scenario, rising to 15 percent to 18 percent in the third scenario. There is likely to be a peaking of the rate of inflation due to devaluation of the rupee.
This brings us to the point that the impact of the war need not only be a fall in external inflows and rise in the import bill.
There is need to incorporate the likelihood of shortages in the supply of key imports due to continued closure of the Strait of Hormuz. This will lead to declines in output in various sectors without a quantum jump in the import bill due to the supply constraints to importing fuel, gas and fertilizer.
The fall in the level of electricity generation is already visible due to the severe shortage of imported gas, especially from Qatar. A source of great concern is also the likelihood of a big shortage of fertilizer.
The prevalence of power load shedding is likely to impact the level of output, especially in the industrial and service sectors. The shortage of fertilizer will have a quantum negative effect on agricultural production.
The alternative approach therefore combines both the impact on the balance of payments and on domestic production. Within an extended period of closure of the Strait of Hormuz, the price of oil is likely to rise sharply.
The price of Brent Crude has already risen from under USD 70 per barrel prior to the war to over USD 105 per barrel currently. This has implied already an annual increase in petroleum imports of almost USD 7 billion, with the pre-war import bill annually of USD 14 billion.
The lack of access to imported LNG and LPG could reduce imports by USD 2 billion. The rise in freight and insurance costs could add USD 3 billion to the import bill. Overall, in the severe scenario, the overall import bill could rise by USD 8 billion.
The flow of remittances from the Middle East countries is 55 percent of the global remittances to Pakistan. The likelihood of a recession in these countries due to a decline in oil and gas exports could result in a 10 percent fall in remittances to Pakistan, equivalent to almost USD 3 billion.
The PRIME estimates also highlight the magnitude of the decline in exports due to a global recession induced by the war in the Middle East. A big drop is assumed at over USD 9 billion. This is probably somewhat on the high side and may be closer to USD 5 billion. The overall consequential impact on the balance of payments is likely to be close to USD 16 billion.
Clearly, this is not feasible because with the corresponding increase in the current account deficit of USD 16 billion, there will be a financing constraint with reserves at USD 15 billion currently. Therefore, the worst-case scenario is likely to witness a big devaluation of the rupee and physical controls on imports, leading thereby to a rate of inflation of close to 18 percent, especially of food prices, as estimated by PRIME.
Turning to the impact on domestic production the likelihood of the largest negative outcome is of agriculture production, due to a big shortage of fertilizer, especially of phosphate fertilizer. Power load-shedding will impact most sectors. A conservative estimate of the impact on the GDP is 4 percent. This is equivalent to a loss of USD 16 billion.
Overall, based on the above methodology, which focuses on a restricted impact on imports due to financing constraints but also includes the magnitude of the likely decline in domestic production, cost of the war in the worst case scenario is USD 32 billion, equivalent to 8 percent of the GDP.
There is no doubt that if the war persists and there is no traffic in the Strait of Hormuz, there will be a global recession and high costs will fall on all economies. This will have a sizeable impact on the level of employment and on poverty due especially to the rise in food prices.
We hope and pray that Pakistan’s excellent mediation efforts will succeed sooner than later and the global costs of the war in the Middle East will thereby be contained.
Copyright Business Recorder, 2026
The writer is Professor Emeritus at BNU and former Federal Minister