S&P cites macro stress risk from ME war

Projects Pakistan's real GDP growth at 3.2% in fiscal year 2027

ISLAMABAD:

S&P Global Market Intelligence has identified Pakistan as the economy facing the highest macro-financial stress risk under a prolonged Middle East conflict scenario. This is part of the latest assessment of major Asia-Pacific (APAC) economies.

The outlook projects Pakistan's real GDP growth to ease to 3.2% in fiscal year 2027, with the balance of risks tilted to the downside, driven primarily by the ongoing war in the Middle East. The assessment underscores Pakistan's near-complete reliance on Gulf crude supplies, heavy dependence on workers' remittances from Gulf Cooperation Council (GCC) countries, large external financing needs, and limited fiscal space as factors that collectively amplify the country's exposure to regional instability.

Ahmad Mobeen, Principal Economist, S&P Global Market Intelligence, said, "Our assessment of major APAC economies shows that Pakistan is likely to experience the most acute effects of a prolonged Middle East war shock due to its high dependence on imported energy and industrial inputs from the region, combined with improving but still limited external and fiscal buffers. Higher energy prices are likely to reverse recent gains on the current account, increase depreciation pressures, and keep inflation elevated. While the initial policy responses helped temporarily mitigate the supply shock and slow the pass-through to households and businesses, the next policy phase is likely to be defined by increasingly difficult trade-offs between maintaining stability, supporting growth, and continuing fiscal consolidation measures under existing IMF programmes without additional bilateral and multilateral funding." On the sectoral front, higher energy prices, supply chain constraints, and trade route disruptions are expected to weigh heavily on manufacturing and export growth, while simultaneously driving up imported input cost inflation.

The report also flags the risk of fertiliser shortages and a moderation in remittance growth, both of which would bear directly on farmers' incomes and crop yields. The second-round effects of energy price inflation are projected to compress private consumption and spill over into the services sector, with transport and retail particularly exposed.

Pakistan's external financing position presents a similarly challenging picture. While external buffers have strengthened in the near term, aided by a new Saudi deposit, anticipated rollovers of existing facilities, and continued access to IMF-linked multilateral and bilateral financing, refinancing risks remain elevated. The recent $3.5 billion repayment to the UAE underscores the scale of forthcoming debt obligations, with Market Intelligence projecting gross external financing needs to average approximately $24 billion annually over the 2026-30 period.