Falling remittances and rising energy prices: a double whammy

As Pakistan grapples with the fear of rising inflationary pressure and a swelling energy import bill – both exacerbated by escalating tensions in the Middle East – a deeper vulnerability is beginning to surface.

Oil price spikes, driven by fears of supply disruptions through critical chokepoints such as the Strait of Hormuz, are already threatening the country's external account. In such a scenario, the traditional cushion of remittances, long relied upon to offset trade imbalances and stabilise the rupee, is no longer assured. Instead, the very region that fuels these inflows now poses a direct threat to their continuity. There is a certain irony in Pakistan's external sector today. Even as remittances surge to record highs, the geography that sustains them has become the country's greatest economic risk. In February 2026, inflows crossed $3.3 billion – among the highest monthly figures recorded – reinforcing their role as Pakistan's primary defence against a balance-of-payments crisis. Yet this resilience masks a fragile reality: a prolonged Gulf conflict could reduce annual inflows by an estimated $3-4 billion, exposing the structural dependence that underpins Pakistan's economic model.

At the core of this vulnerability lies concentration risk. Saudi Arabia and the United Arab Emirates together contribute over $11 billion annually, accounting for more than a third of Pakistan's total remittances. This effectively ties a majority of the country's "dollar liquidity" to a single geopolitical corridor. In times of stability, this concentration offers predictability. In conflict, it transforms into systemic exposure.

Remittances constitute roughly 9-10% of Pakistan's GDP, a proportion that underscores their macroeconomic importance as compared to other beneficiaries of such inflows in the region. These inflows finance a significant portion of the trade deficit, support foreign exchange reserves, and sustain household consumption across the country. Their disruption would not simply reduce income levels; it would reverberate across fiscal stability, currency management, and growth prospects. The most immediate channel of impact would be the labour market. Pakistani expatriates – numbering over five million in the Gulf – are heavily concentrated in sectors such as construction, retail, transport, and domestic services. These industries are highly sensitive to economic cycles and geopolitical shocks. In the event of a prolonged conflict, Gulf governments are likely to redirect fiscal resources toward defence spending, delaying or cancelling infrastructure projects that employ millions of foreign workers.

Going through the recent Covid playbook, there is the risk of a "returnee crisis." Large-scale layoffs or contract terminations would trigger a sudden influx of returning workers into Pakistan's already constrained labour market. The dual effect of reduced remittance inflows and rising domestic unemployment could place severe pressure on social safety nets, particularly in remittance-dependent regions. The domestic economic consequences would be widespread. The real estate sector – a traditional recipient of overseas investment – would likely face a slowdown as expatriate buyers withdraw. Construction activity, already under pressure from recent economic slowdown, could contract further. Similarly, consumer-driven sectors such as retail, healthcare, and education would experience reduced demand as remittance-dependent households adjust their spending patterns.

The banking sector would also come under strain. Remittances contribute significantly to deposit growth and foreign currency liquidity. A sustained decline would complicate exchange rate management and increase dependence on external financing, reinforcing Pakistan's cyclical balance-of-payments challenges. In comparative perspective, Pakistan's exposure is unusually high and concentrated. India, despite being a leading recipient of remittances, has diversified its diaspora toward high-skilled employment in the United States and Europe, with remittances accounting for only about 3-4% of GDP.

The Philippines, while similarly dependent in volume terms, has achieved geographic and sectoral diversification. This contrast underscores a structural weakness in Pakistan's migration strategy. The country continues to export predominantly low- and semi-skilled labour, tying its economic fortunes to sectors that are both cyclical and geographically concentrated.

Policy responses must, therefore, extend beyond short-term stabilisation. In the immediate term, maintaining parity between inter-bank and open-market exchange rates is essential to discourage the diversion of flows into informal channels. Expanding initiatives such as the Roshan Digital Account and introducing diaspora investment instruments with risk-adjusted returns could help sustain inflows during periods of uncertainty.

At the same time, proactive engagement with Gulf states is necessary to safeguard employment contracts, address visa issues and protect Pakistani workers under exceptional circumstances. Diplomatic channels must be leveraged to minimise labour displacement in the event of prolonged instability. However, the deeper imperative is structural reform. Pakistan must transition toward skill-based migration, enabling its workforce to access higher-value opportunities in more stable markets such as Europe and East Asia. Bilateral labour agreements with countries facing demographic decline – including Japan, Germany, and South Korea – offer a pathway toward diversification.

Ultimately, remittances have long masked the shortcomings of Pakistan's domestic economic framework. Overreliance on external labour income has delayed necessary reforms in industrial policy and export competitiveness. Moving toward an export-led growth model is essential to reduce vulnerability and achieve sustainable economic stability. The real challenge lies beyond managing the immediate shock. An economy sustained by remittances cannot deliver long-term stability. Pakistan must move decisively toward an export-led growth model, where productivity, industrial depth, and global competitiveness replace dependence on overseas labour. Without this shift, remittances will remain not a strength, but a constraint on sustainable development.

The writer is a financial market enthusiast and is associated with Pakistan's stocks, commodities and emerging technology