Oil shock
EXTERNAL shocks have repeatedly shaped Pakistan’s economic trajectory. From oil crises to global financial turbulence, the pattern is a familiar one: rising import costs weaken the balance-of-payments, inflation accelerates and pressure mounts on the exchange rate. The latest tensions in the Middle East threaten to trigger a similar sequence at a moment when Pakistan’s policy space is already constrained by an IMF stabilisation programme.
The Middle East crises, combined with Pak-Afghan border tensions and persistent security challenges in the tribal districts and Balochistan, adds another layer of economic pressure just as the country had begun to achieve a measure of stability.
The most immediate risk lies in the trade balance as commodity tailwinds reverse. Pakistan imports roughly between $16 billion and $18bn of petroleum products annually — about a quarter of total imports. Every $10 increase in oil prices would add around $1.5bn to $2bn to the import bill.
At the same time, higher freight costs and weaker global demand could soften exports, particularly textiles. The combination of higher energy imports and slower export growth would widen the current account deficit and put renewed pressure on the rupee.
Remittances provide another important buffer; at around more than $40bn annually, they remain our largest source of foreign exchange. Prolonged regional instability could affect the Gulf’s labour markets. If the current account deficit widens, pressure on the exchange rate will intensify. Here, experience shows that defending an artificially strong currency quickly depletes foreign exchange reserves. Allowing the exchange rate to adjust in an orderly manner is preferable to unsustainable intervention.
But unlike previous crises, Pakistan can’t respond through large subsidies or deficit-financed stimulus. The IMF programme leaves little fiscal room for such measures. Past attempts to suppress energy prices through subsidies offered temporary relief but worsened fiscal imbalances and circular debt.
A series of crises have left us with limited policy space.
A more sustainable response lies in managing consumption while protecting vulnerable households. Energy conservation, then, must become an important policy tool. Measures such as staggered office hours, expanded work-from-home, reduction in fuel allowance for civil servants and earlier market closures can reduce fuel consumption without imposing large fiscal costs. Individually modest, such steps can collectively ease pressure on the oil import bill.
For households, the first visible impact of an oil shock is inflation. Higher fuel prices quickly translate into rising transport costs, higher food prices and increased electricity tariffs. The appropriate response is not blanket price suppression but targeted support for low-income households through programmes such as BISP.
Monetary policy will also face constraints. Pakistan has begun cautiously lowering interest rates as inflation moderated, but a renewed oil-driven inflation shock could push inflation beyond the State Bank’s five to seven per cent target, limiting the scope for further easing.
Higher import costs and tighter financial conditions typically slow consumption and investment. Policymakers should prioritise protecting employment and productive — particularly export-oriented — sectors rather than attempting to stimulate consumption through unsustainable fiscal steps.
Fiscal constraints reinforce this reality. Our public debt has climbed to nearly Rs80 trillion, while annual interest payments approach Rs9-10tr — absorbing well over half of federal revenues. This leaves little room for tax cuts or broad subsidies. Managing the fiscal account will require meaningful reductions in non-essential government spending, tighter control of administrative expenditure and better targeting of subsidies.
Expecting rapid economic growth under these conditions would be unrealistic. External shocks, high energy costs and IMF-mandated stabilisation are more likely to keep GDP growth modest — well below the 5-6pc Pakistan needs to absorb its expanding labour force. Slower growth combined with rising fuel and food prices will also increase poverty by eroding real incomes and slowing job creation.
The temptation will again be to suppress prices, defend the currency artificially and borrow more to cushion the impact. That path has repeatedly produced short-lived relief followed by deeper instability.
The wiser course is less dramatic but more durable: conserve energy, cut government expenditure, protect the poorest households, allow the exchange rate to adjust and maintain fiscal discipline. External shocks cannot always be avoided but economic crises can through good policy choices.
The writer is former CEO of Unilever Pakistan and the Pakistan Business Council and advocates sustainable and inclusive economic policy.
Published in Dawn, March 10th, 2026