By Staff Reporter
KARACHI: Pakistan is the most vulnerable major Asia-Pacific economy to macro-financial stress from a drawn-out Middle East conflict, S&P Global Market Intelligence said Monday, cautioning that elevated energy costs and external financing strains could unravel the country’s tentative recovery.
The assessment comes as the Iran war — sparked by joint US-Israeli strikes on Tehran in February — continues to roil energy markets and shipping lanes, even after a fragile ceasefire was declared in April. Iran’s blockade of the Strait of Hormuz, the chokepoint carrying about one-fifth of global oil and gas supplies, has amplified price volatility and supply risks for import-dependent nations.
For Pakistan, the fallout is particularly acute. The country depends heavily on Gulf crude for its energy needs, remittances from Pakistani workers in the Gulf states, and multilateral financing tied to its International Monetary Fund program. Years of high inflation, depleted foreign-exchange reserves and repeated balance-of-payments crises have left it with limited room to absorb external shocks.
“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,” Ahmad Mobeen, principal economist at S&P Global Market Intelligence, said in a statement.
Higher energy prices will probably reverse recent current-account gains, intensify currency depreciation pressures and keep inflation stubbornly high, he added. S&P projected Pakistan’s economic growth would slow to 3.2% in fiscal 2027, with risks skewed to the downside amid the regional turmoil. Fuel costs, supply-chain disruptions and uncertainty over trade routes are expected to weigh on manufacturing and exports while feeding imported inflation through the broader economy. The report also flagged risks of fertilizer shortages and softer remittance inflows, which could crimp agricultural production and rural household incomes.
Initial policy measures have helped blunt the immediate supply shock and limit its pass-through to businesses and consumers, S&P noted. But the next phase will involve tougher choices: balancing macroeconomic stability, supporting growth and sticking to fiscal consolidation under the existing IMF framework — all without fresh bilateral or multilateral support.
Pakistan has made progress in recent months stabilizing its finances under the IMF-backed reform program, narrowly averting sovereign default in 2023. Yet the economy remains highly sensitive to outside shocks because of its reliance on imports and a heavy debt-servicing schedule. External buffers have strengthened somewhat in the short term, thanks to Saudi financial assistance, anticipated refinancing rollovers and continued disbursements linked to the IMF program. Still, refinancing risks are elevated. Pakistan faces large debt repayments ahead, with annual gross external financing needs averaging roughly $24 billion between 2026 and 2030. The combination leaves Islamabad with scant margin for error as the Middle East conflict drags on.
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