By Staff Reporter
ISLAMABAD: Commodity price shocks triggered by the US-Israel war against Iran are exposing Pakistan’s deep external vulnerabilities and threaten to delay or even derail the country’s $7 billion International Monetary Fund loan program, global economic advisory firm Oxford Economics warned in a recent report.
Pakistan, which relies overwhelmingly on fuel imports from the Middle East to meet its energy needs, has been hit hard by the conflict that began in February. Tensions in the Strait of Hormuz have disrupted global energy flows, pushing oil prices sharply higher and inflating import costs for import-dependent economies such as Pakistan.
The South Asian nation has pinned its hopes for stabilizing its external accounts on a 37-month, $7 billion IMF program aimed at rebuilding foreign-exchange reserves and shoring up its financing position. That effort now stands at risk, according to Oxford Economics. “The commodity price shock from the US-Israel war with Iran is exposing Pakistan’s external vulnerabilities and could delay or even derail the IMF’s $7 billion program,” the firm said in its research briefing.
As a major importer of liquefied natural gas from the Gulf region, Pakistan is particularly exposed to elevated global oil and gas prices as well as potential supply disruptions, the report said. Islamabad also depends heavily on trade and remittance inflows linked to the Gulf states. The combination is amplifying pressure on the country’s external position through a swelling import bill and softer foreign-exchange receipts.
Under its new baseline assumptions for commodity prices, Oxford Economics now projects that Pakistan’s foreign reserves will fall to $6.8 billion by the end of 2026, down from a pre-war level of $20.8 billion, before sliding further to about $1.6 billion in fiscal 2028. The firm assumes oil will average $113 a barrel in the second quarter of 2026 before easing to $79 a barrel by the fourth quarter. It is also factoring in higher prices for gas and other commodities. Those estimates do not include any worsening in remittance inflows or additional import compression measures.
Pakistan’s economy is heavily dependent on remittances from its overseas workers, the vast majority of whom are based in the Gulf. The report flagged those flows as a key downside risk. The economic fallout from the Iran war on Gulf labor markets and state finances could curb remittances, Oxford Economics said. “If remittances were to decline, foreign reserves would deplete even more severely, further underscoring Pakistan’s external fragility,” the firm added. To protect its reserves, the government is expected to compress imports through a mix of demand destruction and, potentially, explicit restrictions — a playbook Islamabad has used in previous balance-of-payments crises. While such steps would reduce the import bill and provide immediate relief to reserves, they would likely intensify supply shortages, stoke inflation and weigh on economic growth, Oxford Economics cautioned.
The warning comes as Pakistan struggles to navigate one of its most challenging external environments in years. The IMF program, approved earlier this year, had been viewed as a critical anchor for restoring market confidence and unlocking additional bilateral and multilateral financing. Any slippage on that front would complicate the country’s ability to roll over external debt and maintain macroeconomic stability.Oxford Economics’ analysis underscores how quickly geopolitical shocks in the Middle East can reverberate through Pakistan’s fragile external accounts, given its structural dependence on imported energy and Gulf-linked financial flows.
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