The potential fallout from the US-Israel war on Iran poses a serious threat to Pakistan’s fragile economic recovery, though the extent of the damage will depend on how the conflict unfolds in the coming weeks. A prolonged war, coupled with persistently high energy prices, could once again push the country into macroeconomic instability, undermining recent gains.
A key concern is Pakistan’s heavy dependence on imported fuel, which leaves it highly exposed to fluctuations in global energy markets. Any sustained rise in oil prices could slow economic growth, disrupting an economy that has only just begun to stabilise after years of financial strain. Beyond energy costs, the conflict could also weaken remittance inflows and reduce export demand as global trade slows.
The external sector faces particular pressure. Higher petroleum prices would inflate the import bill, while exports — already declining — could fall further amid weakening demand in international markets. At the same time, slower growth in Gulf economies, which provide a significant share of Pakistan’s remittances, could trigger an additional external shock, worsening the country’s financial imbalance.
While the current account deficit remains manageable for now, it could widen considerably if these pressures persist, with the full impact likely to emerge in the next fiscal year. The situation echoes the 2022 economic crisis in Pakistan, when surging global commodity prices pushed the country to the brink and forced it to seek assistance from the International Monetary Fund.
For ordinary citizens, the consequences could be severe. Rising global oil prices would translate into higher fuel and electricity costs, while also driving broader inflation through increased transportation and logistics expenses.
The progress made in FY25, particularly in easing inflation, risks being reversed. If oil prices climb to levels seen during the Ukraine war, Pakistan could once again face a period of high inflation — placing renewed pressure on households that are still recovering from previous economic shocks.
With the economy only beginning to regain stability, the risks posed by external geopolitical developments remain significant and could quickly derail the recovery.