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The escalation in the military conflict between Iran and Israel following the latter’s strikes against Tehran’s nuclear programme is bad news for Pakistan’s growth push as well as the stability of its austerity budget for the next fiscal year. Though the upside risks to the nation’s economic goals hinge on the scope and duration of the war in the Middle East, the rising global oil prices are already unnerving analysts and businesspeople alike.
“It is too early to make any definitive projection at the moment,” a senior Karachi-based financial analyst said. “We do not yet know how long the two adversaries will remain locked in this conflict or if it has the potential to draw in other regional countries or lead to oil supply and trade disruptions in the region.”
But if the war between Iran and Israel lingers, drawing in the rest of the region and leading to oil trade disruptions, he argues, it will be “very, very negative for Pakistan’s feeble economy and its push for growth in the short- to long-term”.
The sudden escalation has jolted energy markets already grappling with rising geopolitical risk across the Middle East. Though Iran’s oil infrastructure remains untouched for now, traders have begun factoring in heightened risk to future supply prices. The fear of potential disruption to the Strait of Hormuz, through which nearly 20 per cent of global oil flows, has pushed energy markets into a defensive posture. For now, oil markets remain volatile, with uncertainty over potential further attacks keeping traders on edge through the weekend.
JP Morgan, in a note published on Thursday, saw oil averaging $60 in 2026 but flagged $120-$130 per barrel as a potential range in the worst-case scenario: a military conflict and a closure of the Strait of Hormuz, through which one-fifth of global oil flows. Markets were already partially pricing in a risk premium before Israel launched its missile against Iranian targets. The bank had noted that such escalations could lead to meaningful supply disruption, particularly if Iran’s 2.1m bpd of exports are cut off.
Pakistan’s recent economic and financial stability largely owes to a massive drop in the international oil and commodity prices, experts maintain. The oil prices, they point out, had nearly halved before the current escalation between Israel and Iran from their peak of $130 per barrel at the beginning of the Ukraine war.
“The lower international oil and commodity prices, drastic fiscal consolidation at the expense of economic growth and rising remittances during the last year have helped Islamabad stabilise the economy. But this story of economic turnaround built on growth suppression, disinflation, and improvements in the external account remains vulnerable to just another oil price shock,” insists another financial analyst heading the research department at a broking firm.
“The government is celebrating macroeconomic stabilisation, but the deeper structural cracks in the economy remain unaddressed. The strength of the economy and the government claims of having put the country on the road to growth will now be tested by the escalation in the region.”
Experts believe a prolonged Israel-Iran war could have significant ripple effects on Pakistan’s economy. “While it’s difficult to predict all outcomes with certainty, the increase in oil costs will feed into inflation as the country is heavily reliant on imported energy and bring pressures on the external sector, leading to a faster currency depreciation and erosion of its meagre international reserves,” a major textile exporter observes.
In case of the blockade of shipping routes, he added, the country might face significant disruptions in trade and supply chains impacting both raw material imports and our merchandise and agriculture exports, besides driving down remittances and investor confidence. “The ongoing conflict between Israel and Iran could trigger a range of economic challenges for us, from energy crises to inflationary pressures to disruptions in international trade from and to Pakistan.”
Many experts have already raised questions over the government claims of a resilient economic recovery, improvements in investor confidence, and its growth target. “Disconnect between growth projections amid the tight fiscal and monetary policies is striking. While the government is boasting of a potential current account surplus, it is the outcome of import compression and rising remittances, not an increase in exports. “The trade deficit in goods still widened to $21.3 billion while the financial account has seen a net outflow of $1.6bn, a sign of weak external sector stability,” argued an economics professor from Lahore.
Even before the start of the Israel-Iran escalation, a National Bank of Pakistan Funds note had warned of upside risks to inflation from any rebound in global commodity prices, domestic wheat prices due to significant crop shortages in the ongoing year, higher than expected currency devaluation, deficit monetisation and heavy reliance on domestic funding sources, which will expand the money supply.
Besides, it has projected GDP growth to remain between 2.5pc and 3pc against the budgeted target of 4.2pc. “We believe that GDP growth will likely remain tepid during FY26. Restrictive fiscal policy will contain government spending, while private sector spending will likely stay lukewarm due to squeezed real income. Monetary setting will also stay tight (high real interest rates). Agriculture and industrial growth are expected to pick up slightly due to the low base effect, though,” it maintained.
It also termed the revenue collection target of Rs14.1 trillion — nearly 19pc higher than the outgoing year’s collection — as ambitious and unlikely to be achieved due to insufficient taxation measures, tight monetary policy and slow economic growth.
How a government already facing significant challenges to its new budget and growth targets will sail through a conflict in the region is anybody’s guess.
Published in Dawn, The Business and Finance Weekly, June 16th, 2025
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