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Pakistan Faces $68 Billion Economic Shock if Middle East War Escalates

Pakistan could face an economic shock of up to $68 billion if Middle East conflict persists and the Strait of Hormuz remains closed. The Policy Research Institute of Market Economy presented three scenarios to the National Assembly Standing Committee on Finance. The worst-case scenario involves crude oil prices reaching $150 per barrel and could trigger a financial crisis despite an IMF program. Inflation could rise to 18% in a prolonged crisis due to currency depreciation and rising food and energy prices.

Key Points: Pakistan's $68B War Economic Risk

  • Pakistan faces $68 billion worst-case economic loss
  • Strait of Hormuz closure could drain foreign reserves
  • Inflation may hit 18% in prolonged crisis
  • Three scenarios outline escalating costs from $10B to $68B
2 min read

Pakistan faces up to $68 bn economic hit if Middle East war escalates: Report

Pakistan could face up to $68 billion economic hit if Middle East conflict persists and Strait of Hormuz closes, warns PRIME report.

"The financing gap in the severe scenario could become unsustainable - Policy Research Institute of Market Economy"

New Delhi, May 7

Pakistan could face an economic shock of up to $68 billion if the conflict in the Middle East persists and the Strait of Hormuz remains closed for an extended period, according to a presentation by the Policy Research Institute of Market Economy to the National Assembly Standing Committee on Finance.

The report cited by Business Recorder outlined three possible scenarios to assess the economic fallout of the war on Pakistan.

In the first scenario, where hostilities ease quickly and the Strait of Hormuz reopens soon, the estimated economic cost to Pakistan is around $10 billion, equivalent to 2.5 per cent of the country's GDP.

The second scenario assumes the conflict continues for another three months, significantly increasing the economic burden to between $24 billion and $32 billion, or nearly 8 per cent of GDP.

In the worst-case scenario, involving a prolonged closure of the strategic waterway and a sharp rise in crude oil prices to $150 per barrel, the total cost could surge to between $50 billion and $68 billion, equivalent to nearly 17 per cent of GDP.

PRIME's analysis focuses primarily on the impact on Pakistan's external sector, including rising import costs, declining exports, and lower remittance inflows.

The report warned that these pressures could sharply weaken the country's balance of payments position and drain foreign exchange reserves, potentially triggering a financial crisis despite the presence of an IMF programme.

Pakistan's current foreign exchange reserves stand at around $15 billion, limiting its ability to finance a widening current account deficit.

The report cautions that the financing gap in the severe scenario could become unsustainable.

Inflationary pressures are also expected to intensify. The report estimates inflation could reach around 10 per cent even in the mild scenario, while a prolonged crisis could push inflation to between 15 per cent and 18 per cent, driven largely by currency depreciation and rising food and energy prices.

- IANS

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Reader Comments

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Amanda J
Interesting read. The scenarios seem well thought out, but I wonder if Pakistan's policymakers are ready for this. Their reliance on IMF programs and limited fiscal space means any shock could spiral quickly. The inflation part is scary—15-18% is crippling for common people. Let's hope diplomacy prevents escalation.
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Kavya N
As an Indian, I feel for the common Pakistani citizen who will bear the brunt of this. Politics aside, economic instability hurts families the most. The report highlighting remittance declines is crucial—Pakistan relies heavily on overseas workers sending money home. A global slowdown would hit that too. India should offer humanitarian help if needed, but also ensure our own energy security is not compromised. 🙏
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Rohan X
While this is about Pakistan, let's not forget India also imports 80%+ of its oil via sea routes. If Hormuz closes, we're in trouble too, though our reserves are larger. The real issue is geopolitical instability in the Middle East—both India and Pakistan need to push for de-escalation. Also, $68 billion is about 17% of Pakistan's GDP—that's like losing a whole year's growth. Time for South Asian neighbors to talk more seriously.
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Nikhil C
One thing I don't understand: Pakistan's military spending is huge, but they can't manage their economy? This report shows how fragile their balance of payments is. The worst-case scenario could trigger a financial crisis worse than 2022 floods. Maybe they should focus on trade diversification and renewable energy instead of relying on volatile geopolitics. Just a thought 🤔
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