Where are we headed?

For the first time in this stabilisation cycle, Pakistan’s foreign reserves have done more than reach their targets; they have surpassed expectations. The State Bank’s reserves rose to an all-time high of $21.44 billion, exceeding the $20.2 billion target set for December 2026 and even crossing the $21 billion level earlier envisaged for June 2027. During this ominous time in the midst of war, it might be fair to question whether this is a moment to rejoice or one of mounting anxiety. I feel the latter. The reserves have bought Pakistan time; oil will decide the price of that time, and the household is already paying it.

This is because the war has produced extraordinary pressure on global oil markets and a rising import bill. The latest movement in oil offers some relief, although its source deserves attention. Brent has eased to around $99.50 a barrel as Gulf exports recover and the G7 releases emergency oil stocks. Gulf energy flows excluding Iran recovered to roughly 81% of their pre-war rate in September. Yet the conflict continues, Iranian exports remain blocked and attacks on regional energy infrastructure persist. Oil has therefore fallen without the underlying geopolitical problem having disappeared. The risk premium has narrowed; the war remains.

Add a volatile stock market, a sticky policy rate of 11.5% and an import bill running far ahead of exports, and the direction remains uncomfortable. The latest Pakistan Bureau of Statistics (PBS) figures now cover the first three months of FY27. Pakistan imported around $19.22 billion worth of goods during July-September while exporting only $8.42 billion. The trade deficit has already reached $10.79 billion, more than 15% higher than the $9.37 billion recorded during the corresponding period last year. Imports increased by more than 13% while exports rose by nearly 11%. Pakistan is still buying more than two dollars of merchandise from abroad for every dollar it sells.

Yet the latest available current-account figures, which run through August, appear remarkably calm. Pakistan recorded a current-account deficit of only $543 million during July-August, down 36% from $853 million in the corresponding period last year. August alone produced a deficit of just $98 million. Remittances are a major reason. Some $7.3 billion arrived in those two months, up nearly 15%, allowing a large merchandise deficit to coexist with a manageable current-account position. The inflow carries its own exposure. Just over half originates in the Gulf, the region most directly exposed to the conflict now driving Pakistan’s energy bill.

That distinction is important because it explains both Pakistan’s new resilience and its continuing vulnerability. The current account says Pakistan presently earns enough remittances and other receipts to finance much of its external consumption; the trade account says the productive structure itself remains heavily dependent upon imports. A prolonged period of expensive energy attacks the weaker side of the equation.

Reserves provide protection against precisely this kind of shock. Yet reserves are a stock while imports are a flow. A country can absorb an adverse flow for a while; if it persists, the reserve stock becomes part of the adjustment. The $21.44 billion buffer gives Pakistan substantially more time than it possessed during earlier crises, though the SBP itself still frames three months of import cover as an objective to be approached. A portion of the latest increase was financed through September’s $3 billion Eurobond, creating interest and principal obligations extending well into the next decade. How expensive that time becomes will depend increasingly upon energy prices and the duration of the conflict.

The domestic consequences have already begun. Petrol now costs Rs393.64 per litre, while high-speed diesel has fallen to Rs397.76. Petrol carries an Rs80 petroleum levy and a Rs5 climate support levy; with customs duty added, the state collects more than Rs100 on every litre. Petrol has held close to Rs400 even as Brent has fallen below $100. Pakistan’s petrol price tracks Gulf refined-product benchmarks, which remain elevated through product shortages, freight and insurance premiums; crude, refined fuel and the pump are moving at different speeds.

Inflation is responding with a similar lag. Headline Consumer Price Index (CPI) eased from 11.1% in August to 10.3% in September, while rural inflation fell from 12.2% to 10.5%. That is welcome. Yet consumer prices still rose 1.3% during September alone. The distinction matters. A lower inflation rate means prices are rising more slowly; it does little to reverse the increases already embedded in household budgets. Wholesale inflation, meanwhile, accelerated from 11.8% to 13.3%, a sign that cost pressures further up the supply chain are still working their way through. The recovery had depended upon an increasingly favourable sequence: lower inflation would create room for lower interest rates, cheaper credit would revive investment, and stronger investment would support growth. Persistent energy costs can delay that sequence. Working capital remains expensive, monetary easing remains constrained and firms have greater reason to postpone investment.

For the common man, the $21.44 billion reserve stock remains an abstraction. His economy consists of petrol near Rs400 per litre, higher bus fares, more expensive freight and the gradual erosion of purchasing power. The higher price level created by the previous shock remains embedded in the household budget even as headline inflation begins to fall.

Agriculture could become the next stage. Pakistan is moving through the Kharif harvest while the Rabi wheat cycle approaches. Diesel enters the cost of tractors, tube wells and transport; fertiliser enters the farmer’s decision about acreage and yield. Higher input costs today can become reduced planting tomorrow and pressure on wheat prices months later, long after Brent has left the headlines.

Fiscal policy faces another contradiction. The government expects petroleum levies to provide a major share of federal non-tax revenue, yet it has simultaneously introduced fuel relief for lower-income consumers. The state therefore depends upon fuel taxation while facing increasing pressure to protect citizens from the price of fuel. Reducing the levy eases household pressure and reduces revenue. Maintaining it strengthens federal receipts and raises the political cost of every international price increase.

That political cost remains visible. Jamaat-i-Islami has kept its campaign against the petroleum levy alive after postponing its long march at the prime minister’s request. On October 6, Hafiz Naeem again warned that the march towards Islamabad would resume if the levy was not abolished. The party is also pursuing a nationwide campaign aimed at securing millions of signatures against the levy, while its demands have expanded to electricity prices, independent power producer (IPP) agreements and wider inflationary pressures. The significance extends beyond one party. The petroleum levy has given a complicated international economic shock a readily identifiable domestic target.

This is how economic grievances evolve. A citizen initially sees a petrol increase. Later, he encounters higher freight, food and transport costs. A business initially accepts lower margins and later raises prices or slows hiring. A household initially cuts discretionary spending and eventually exhausts that buffer. The farmer experiences diesel and fertiliser, the trader experiences weaker demand, industry experiences expensive credit and the salaried worker experiences declining purchasing power. Political pressure increases when these separate experiences begin acquiring a common explanation. The duration of the conflict therefore matters enormously. A short-lived oil spike can be absorbed by reserves, remittances and temporary fiscal measures. A prolonged period of elevated energy prices begins changing inflation expectations, investment decisions, agricultural inputs, monetary policy and household behaviour.

There is still a favourable route out. The recovery in Gulf exports and the release of emergency oil stocks have already pushed Brent back below $100. A durable reopening of regional shipping routes and a political settlement would go considerably further, reducing freight and insurance costs, easing Pakistan’s import bill, protecting the rupee and eventually restoring greater room for monetary easing. The present decline in oil demonstrates that the sequence can move in both directions; it also remains dependent on a fragile security environment.

Pakistan enters this phase with more ammunition than it has possessed for years. The reserve stock is real, remittances remain powerful and the latest available current account remains manageable. Underneath those achievements lies a trade deficit of $10.79 billion in only three months, imports running at more than twice exports, double-digit inflation and a political argument over who should bear the cost of expensive energy.

The war enters Pakistan first through the price of a barrel. It then travels into the import bill, the exchange rate, the petrol pump, the interest rate, the farm, the factory and the household budget. Eventually, it reaches the street. Reserves lengthen that journey; oil decides its cost. Where the chain stops will tell us where Pakistan is headed.