Rising oil prices threaten Pakistan inflation, external account

A sharp rise in global oil prices is expected to increase pressure on Pakistan’s inflation and external accounts, although equities remain attractive at current levels, according to research reports by Intermarket Securities and JS Global.

Brent crude has climbed in recent sessions, heightening concerns for Pakistan, which relies heavily on imported energy.

Intermarket estimates that for every $5 per barrel increase above its base case assumption of $60 to $65 per barrel, Pakistan’s consumer price index over the next 12 months would rise by an average 40 basis points.

Crude-related products account for roughly 18% of Pakistan’s total import bill, the brokerage said. Each $5 per barrel increase would widen its fiscal 2026 and 2027 current account deficit projections by about 20 basis points of gross domestic product.

Still, Intermarket noted that geopolitical oil price spikes are often temporary and tend to reverse as tensions ease, limiting the longer-term macroeconomic impact.

Impact on stocks

Despite near-term risks, both brokerages said they remain constructive on Pakistan’s equity market.

“The recent market correction has opened up valuation upside, while the earnings outlook and broader macro backdrop remain largely intact,” Intermarket said, adding that current levels could offer an attractive entry point unless oil prices remain elevated for an extended period.

JS Global urged investors to remain selective amid geopolitical uncertainty but said improving domestic fundamentals continue to provide support.

The reports outlined mixed sectoral implications if oil prices stay high or if key shipping routes such as the Strait of Hormuz face disruption.

Banks are viewed as relatively well positioned compared with previous cycles. Large lenders, including Habib Bank Ltd., MCB Bank Ltd., United Bank Ltd. and National Bank of Pakistan, could benefit in the short term from higher interest rates and improved net interest margins, particularly those with greater exposure to floating-rate government securities and strong low-cost deposit bases.

However, a prolonged oil shock lasting more than six months could weaken asset quality, slow credit growth and raise provisioning costs, the brokerages said.

Oil and gas exploration companies could see earnings revised upward by 10% to 14% if crude averages $75 to $80 per barrel, compared with a $65 base case. But any easing of geopolitical tensions or increased supply from OPEC could push prices back toward $65, limiting upside.

Cement manufacturers face indirect pressure from higher coal prices, which have already risen this year. While elevated input costs may weigh on margins, recent consolidation in the sector has strengthened pricing power.

Fertilizer producers may experience divergent effects. Importers of diammonium phosphate and phosphoric acid could face margin compression from a weaker rupee and higher global prices, while urea manufacturers reliant on domestic gas supplies are considered more resilient.

Technology exporter Systems Ltd. was identified as a potential beneficiary of currency depreciation, as its dollar-denominated revenues would translate into higher local earnings. Higher oil prices could also support fiscal spending by Middle Eastern clients, sustaining demand for digital services.

Automakers were described as more vulnerable. Rising oil prices and a weaker rupee would increase the cost of imported parts and could prompt higher interest rates, dampening demand and squeezing margins.

Oil marketing companies may record short-term inventory gains during price upswings but could face higher working capital requirements and softer demand. Power producers risk an increase in circular debt if higher fuel costs lead to tariff adjustments, while pharmaceutical companies — heavily reliant on imported raw materials — may see margins pressured by rising freight and input costs.

Macroeconomic trajectory provides cushion

Separately, JS Global noted an International Monetary Fund mission arrived in Pakistan on Feb. 26 for the third review of the country’s Extended Fund Facility program. A successful review could unlock a $1.2 billion disbursement.

During discussions with the Pakistan Business Council, the IMF signaled a potential gradual reduction in the super tax beginning in fiscal 2027. JS Global estimates that every 2.5 percentage point cut from the current 10% rate could boost corporate and banking sector earnings by 4% to 5%.

While warning that elevated oil prices remain a key risk to inflation and the external account, the brokerages said Pakistan’s improving macroeconomic trajectory provides some cushion if geopolitical tensions subside.