PIDE warns global conflict could trigger crisis for Pakistan

The Pakistan Institute of Development Economics has warned that the ongoing conflict involving the United States, Israel and Iran in the Middle East is rapidly evolving into a global economic crisis with serious consequences for Pakistan’s fragile economy.

In a report, the institute said the confrontation has moved beyond a regional political dispute, disrupting global trade routes and energy supply chains while threatening Pakistan’s external sector.

“The crisis has destabilized the Middle East and disrupted Pakistan’s direct and indirect trade with Gulf countries,” the report said, adding that the situation could significantly impact exports, imports and overall economic stability.

According to the study, Pakistan’s exports to the Gulf Cooperation Council countries could fall by between $1.5 billion and $2 billion if key shipping routes remain blocked, particularly following the closure of the Strait of Hormuz.

At the same time, imports from the Gulf — largely energy supplies — could decline by about $3 billion, potentially disrupting domestic production and export industries dependent on fuel and raw materials.

The report also warned of rising energy costs, estimating that higher oil prices could increase Pakistan’s import bill by $4.5 billion, widening the current account deficit and adding to external debt pressures.

“The pressure on foreign exchange reserves could once again become unsustainable,” the institute said, noting that reduced export earnings and lower remittance inflows could further weaken the balance of payments.

The think tank said Pakistan’s border trade with Iran is already under strain and is likely to decline further as the conflict intensifies.

Inflation is another major concern. The report cautioned that surging oil prices could push Pakistan back into double-digit inflation, reversing gains made during fiscal year 2025.

The follows a sharp escalation in tensions after reported attacks by U.S. and Israeli forces on Iran in late February, followed by retaliatory strikes by Iran on regional targets and the closure of the Strait of Hormuz — a key route for about 20% of global energy supplies.

The institute said Pakistan’s heavy reliance on Middle Eastern trade and energy imports makes it particularly vulnerable to such disruptions.

“Countries like Pakistan will be disproportionately affected if the crisis persists,” the report said.

It also highlighted long-standing structural weaknesses in Pakistan’s economy, including reliance on imports, expensive energy, policy inconsistencies and limited export diversification, which have historically left the country exposed to external shocks such as the 2008 energy crisis and the COVID-19 supply chain disruptions.

To mitigate the impact, the report recommended rerouting oil imports through alternative routes such as the Yanbu port in Saudi Arabia’s Red Sea region, diversifying energy sources and leveraging new trade opportunities under regional initiatives.

The think tank also urged policymakers to focus on improving competitiveness, innovation and efficiency to withstand future global shocks.

“This crisis is a test case in a rapidly changing global landscape,” the report said. “Survival will depend more on competitiveness than external support.”