Fragile economic recovery

The reignition of tensions in the Middle East is worrying planners in the Ministry of Finance, who are now accepting that inflation is going to be a major problem going forward. As much as they tried to show off a silver lining - recent reports highlight that macroeconomic stabilisation has been "largely achieved" and growth momentum sustained. But no amount of optimism can mask the fact that we are almost entirely reliant on imported fuel for our energy needs. As oil prices rise, our economy frays.

Data from the first phase of the conflict - prior to the Islamabad Memorandum's ceasefire - backs up public concerns. At the height of the initial US-Iran fighting in May, Pakistan's inflation hit a brutal two-year high of 11.7%, driven largely by a staggering 36.8% year-on-year surge in transport costs. Brent crude already surpassed $100 a barrel amid fresh attacks, and despite a recent price decline, some analysts warn it could exceed $120 if the Strait of Hormuz remains disrupted. The finance ministry itself acknowledges that normalisation of global energy prices remains contingent on a "durable and lasting peace agreement between the US and Iran" - a prospect that looks increasingly distant as the US continues to move further away from its stated goals in the conflict.

Closer to home, our unending source of foreign exchange has hit a roadblock, as remittances are expected to dry up due to the impact of the war on most of our top remittance sources. Meanwhile, several businesses are facing direct fallout due to inflation and non-price issues, making it harder for them to pay their employees well or even keep the doors open.

Pakistan did not choose this war, but it must live with its consequences. The government's consideration of targeted subsidies is welcome, but band-aid solutions cannot substitute for a fundamental recalibration of the country's energy and fiscal frameworks.