Middle East War Fuels Double-Digit Inflation in Pakistan’s Economy

Topline Securities Ltd released its latest "Pakistan Strategy" report on Saturday, providing a grim analysis of how soaring energy costs and regional instability are battering the Pakistani economy and its volatile stock market. The brokerage highlighted that the situation is "prolonged and evolving," with any hope of stability resting entirely on an immediate and peaceful resolution to the conflict.

The report, as cited by Dawn, projects that under current conditions, inflation in Pakistan could average between 9 and 10 per cent over the next year, with fourth-quarter FY26 figures expected to exceed 11 per cent. These estimates are based on oil at USD 100 per barrel, noting that every USD 10 spike adds roughly 50 basis points to the inflation burden. Should prices hit USD 120 per barrel, annual inflation could reach 11 per cent, likely forcing the State Bank of Pakistan into further aggressive interest rate hikes.

This inflationary pressure is expected to cripple economic expansion, leading Topline Securities to slash its GDP growth forecast for FY27 to a mere 2.5 to 3.0 per cent, down from an original 4.0 per cent. While FY26 growth is currently estimated at 3.5 to 4.0 per cent, the industrial sector remains at high risk, with potential growth collapsing to just 1 per cent from nearly 4 per cent.

Dawn further noted that the nation's current account deficit for FY27 could balloon to over USD 8 billion if the government fails to maintain stringent and restrictive import controls. Such a massive slippage would further deplete Pakistan's already precarious foreign exchange reserves. Additionally, the fiscal deficit for FY26 is expected to hover between 4.0 and 4.5 per cent of GDP, overshooting targets set by the International Monetary Fund.

The Pakistan Stock Exchange has emerged as one of the world's worst performers due to the country's heavy reliance on imported energy, with petroleum imports projected to consume USD 15 billion in FY26. According to Dawn, the country imports 85 per cent of its energy requirements, a dependency that saw the market plunge 15 per cent in the first quarter of the year.

The economic outlook is darkened by a projected 3.5 per cent drop in remittances, particularly as contributions from the Gulf Cooperation Council region are expected to fall by 10 per cent. Exports are also forecast to decline by 4 per cent. On the currency front, the exchange rate is predicted to deteriorate, with the PKR expected to drop to 298 against the USD by FY27.

Persistent conflict could drive depreciation far beyond the historical average, leaving the PKR vulnerable to significant supply and demand pressures. Dawn highlighted that while domestic exploration firms might eventually increase production to offset some liquefied natural gas imports, the immediate future remains defined by high interest rates, rising urea prices, and a deepening reliance on emergency administrative measures to prevent a total macroeconomic collapse.

- ANI