Oil shock and the import trap
The conflict in the Middle East has once again created a wave of uncertainty amid increasing volatility in oil prices. Although the conflict is external, the implications for the domestic economy are significant.
At the time of writing, Brent and West Texas Intermediate (WTI) crude oil prices showed significant oscillation, suggesting uncertainty in the oil market. The length of the conflict and the extent of damage to oil infrastructure are likely to dictate the trend in global oil prices. A shorter conflict will likely have a limited impact, while a prolonged conflict with significant damage to oil infrastructure in the region may result in pushing Pakistan into another debt trap.
The "petrol bomb" has hit Pakistan's economy with significant force as escalating oil prices are not only likely to impact fiscal balances but also Pakistan's external account. The petroleum levy on petrol surpassed Rs100 per litre in the revision on March 7, 2026. Rising oil prices will exacerbate the trade deficit, while sustained pressure from the trade deficit can consequently result in a balance-of-payments crisis.
It is expected that the monthly import bill will increase by $600 million, deteriorating the current account deficit. The SBP, which had previously forecast keeping the current account deficit below 1% of GDP, is expected to revise its forecast to absorb not only rising inflation risks but also risks to the external account.
Inflation rates are likely to increase due to the second-round effects of rising food and transport costs. Further inflows of remittances, which had increased to unprecedented levels, may also face uncertainty as expatriates in the Middle East encounter challenges in their host countries. A majority of these inflows originate from the Gulf countries, which cumulatively host more than five million Pakistanis.
More than $560 billion worth of mineral products, out of a total of $3 trillion traded globally, was exported from the Gulf countries in 2024, according to the International Trade Center's Trademap.org. Approximately $210 billion was exported from the UAE and Qatar. The majority of mineral product exports from the Gulf countries flow through the Strait of Hormuz, which has been blocked by Iran since the start of the conflict.
Qatar is the largest exporter of LNG in the world, and Pakistan imported more than $3.5 billion worth of LNG from Qatar in 2024, accounting for approximately 90% of its total LNG imports. Interestingly, Pakistan is also a key export destination for Qatar's LNG, following major Asian economies such as China, the Republic of Korea and India. The rise in the price of natural gas itself will adversely impact the fertiliser industry and consequently the agricultural sector, further threatening the price stability of food products.
Pakistan has one of the highest percentages of fuel imports in total merchandise imports in the world. According to the World Bank's World Development Indicators, 32% of merchandise imports into Pakistan in 2024 were fuel imports, primarily for consumption in the domestic market as re-export of fuel products is minimal. This level is comparable to low-income sub-Saharan African economies rather than middle-income economies with more developed manufacturing sectors and stronger participation in global and regional value chains. Such countries typically report a larger volume of imports of industrial inputs and capital goods.
The average for the East Asia and Pacific region is 18%, with countries like Thailand and Malaysia below that level and Vietnam at 8%. Pakistan is therefore more exposed to volatility in global oil prices than several of its regional counterparts. Although India is also at 32%, it is one of the largest exporters of fuel products in the world and will better absorb price shocks as it has developed linkages between exports and imports of fuel products.
Therefore, while fuel imports drive Pakistan's trade structure, other regional countries have trading linkages within their manufacturing and industrial sectors that are not as exposed to blockages in the Strait of Hormuz. Their policymakers have alternatives to ensure their economies absorb shocks from disruptions in the Middle East. Meanwhile, Pakistan will have to face a double-edged sword as both higher prices as well as shortages hit the fuel market.
Electricity production in Pakistan is dependent on the imports of LNG. While 17% of electricity production in Pakistan is generated from oil sources, according to the World Development Indicators, the average for East Asian and Pacific countries is less than 1% and that for India and Vietnam is less than 0.2%. Several East Asian and Pacific countries that produce electricity using thermal sources of energy fulfil their needs by tapping into their domestic sources rather than purchasing imported fuels as is the case for Pakistan.
Further, Pakistan imports the majority of its fuel from Gulf countries and through the Strait of Hormuz. The availability of domestic sources of energy will likely shield economies from sudden spikes and shortages. However, it is important to note the recent shift towards renewable sources of energy, primarily solar. The benefits from this shift have been documented by several experts in Pakistan. It is imperative to ensure that solar energy becomes more prevalent, especially now as regional conflicts have curtailed supply chains linked to thermal sources in Pakistan.
In essence, another major regional conflict has created a significant challenge for economic policymakers in Pakistan who are already grappling with several domestic issues. It is imperative for policymakers to reduce dependency on imported oil and replace not only the energy sources with renewable and domestic alternatives but also narrow the stream of demand drivers.
For instance, now is the time to push for better adoption of new electric vehicles that are charged using locally produced solar energy. Further, the increase in petroleum levy could be used to finance capacity-related payments in the power sector such that returns on solar energy investments continue to remain attractive. Lowering dependency on imported oil can eventually help reduce the balance-of-payments vulnerabilities in Pakistan.
THE WRITER IS AN ASSISTANT PROFESSOR OF ECONOMICS AND RESEARCH FELLOW AT CBER, IBA