Oil shock may cost Pakistan 1.5pc of GDP: experts

AI Summary

Experts warn that the ongoing US-Iran war and resulting oil price surge could cost Pakistan 1.0–1.5% of GDP, with the external sector facing a $12–14 billion shock over the next year. Rising petroleum import costs, global shipping and insurance premiums, and potential loss of Middle East remittances compound the economic threat. Pakistan risks revisiting its 2021–22 financial crisis conditions if oil prices remain elevated.

• External sector may face $12-14bn shock over next year, warns Hafiz Pasha • Ex-SBP chief Ishrat insists daily fuel price adjustments may cut hoarding incentives • IMF may use crisis to demand deeper concessions, says Kaiser Bengali KARACHI: If the war continues and oil prices remain around $100 or higher, Pakistan could face a GDP hit of 1.0 to 1.5 per cent, a figure that may worsen if the regional conflict persists beyond six months, warns former finance minister Hafiz Pasha. The most critical threat lies in the external sector, where Pakistan could face a negative impact of $12 to $14 billion over the next year. This would be driven in part by petroleum imports, which may rise by 25pc to 30pc as oil prices surge. At the same time, global shipping and insurance premiums are rising exponentially as regional risk intensifies, further inflating the import bill, Mr Pasha says. Remittances present another layer of vulnerability. Roughly 55pc of Pakistan’s remittances come from the Middle East. As these oil-dependent economies contract due to export disruptions, demand for foreign labour may drop. Pakistanis and Bangladeshis are often the first to be sent home, potentially costing Pakistan $2bn to $4bn in inflows. Taken together, these pressures could push Pakistan away from the currently manageable $2bn current account deficit towards a $6bn-7bn gap by the end of this fiscal year. With only three months remaining, the larger deterioration would likely unfold in the next fiscal year (2026-27), he adds. In many ways, the trajectory risks mirroring the 2021-22 crisis, when foreign exchange reserves collapsed to nearly $4bn. Without a shift in the external environment, the pressure on reserves could once again become unsustainable. Higher oil prices also imply a return to double-digit inflation, reversing the stabilisation achieved during FY25. The transmission mechanism is both direct and indirect: an immediate surge in petrol and energy prices followed by a second-round inflationary wave as transport costs push up prices of basic goods and services. While inflation hovered near 7pc in February, it has already crossed the 10pc threshold. Should prices approach the $120 peaks seen during the Russia-Ukraine conflict, Pakistan risks revisiting the near-30pc inflation environment of that period, he adds. Before the US attack on Iran, growth had been trending towards the “right side” of 3pc. That trajectory is now under threat, with three key sectors most exposed. First is transport, which accounts for roughly 10pc of the economy and ranks just behind wholesale and retail trade in scale. Higher fuel costs will suppress demand, leading to contraction. Second is industry. Disruptions in LNG imports are already constraining fertiliser and cement production, while textile firms reliant on captive gas power face similar pressures. Third is agriculture. As domestic fertiliser units shut and global supply tightens, particularly with disruptions involving Qatar, productivity may fall in the next crop cycle. Oil maths and silver linings For every $10 increase in oil prices, Pakistan’s annual import bill rises by roughly $1.5bn. If prices remain $20 above the pre-war baseline of $80, the economy faces an immediate $3bn shortfall, notes former State Bank governor Ishrat Hussain. Avoiding default, he argues, will require abandoning “business-as-usual” policymaking. One potential response is shifting from weekly to daily fuel price adjustments. By aligning domestic prices more closely with global volatility, the government could reduce hoarding incentives and provide clearer price signals to consumers. The urgency of this shift is underscored by the collapse of the RLNG supply chain, particularly after Qatar’s recent force majeure. As these costly imports recede, Pakistan is being forced to reactivate domestic Sui gas reserves that were previously suppressed. However, the transition to indigenous energy is hampered by a lack of transmission infrastructure for existing wind and coal projects. The short-term survival strategy, therefore, relies on a forced substitution model where the six indigenous sources — hydro, nuclear, local coal, domestic gas, wind and solar — must rapidly increase their collective share of the energy mix to displace the high-cost imported fuels that are currently driving the country towards a fiscal breaking point. While these vulnerabilities are stark, they may inadvertently provide the “silver lining” needed for long-term energy security. The current crisis is forcing a long-overdue realisation regarding our over-reliance on foreign LNG. If the government can successfully fast-track the transmission of indigenous power, the next six months could mark a fundamental shift in the economy. By prioritising domestic resources over the volatile international market, Pakistan might finally move away from the import-led model that has historically left its GDP at the mercy of global conflict. The IMF angle an