Pakistan's tentative economic revival is facing a renewed threat as the Middle East conflict drives up global oil prices, raising fears of resurgent inflation, widening external deficits and a sharp slowdown in growth.
After a difficult previous year, the economy had begun to stabilise. Growth picked up from 3.1% in 2024-25 to 3.7% in the first quarter of the current fiscal year, with projections nearing 4% for 2025-26. This improvement was underpinned by a strong performance in manufacturing and a rebound in investment activity.
Industrial expansion proved particularly robust. Large-scale manufacturing grew by around 6% in recent months, while broader industrial output surged even faster earlier in the year. Increased consumption of petroleum products and a rise in machinery imports signalled a revival in economic activity.
Investment indicators reinforced this trend. Private-sector credit expanded sharply, development spending rose significantly, and imports of capital goods increased. Inflation, though edging upward, remained in single digits, rising from just above 4% mid-year to 7% by February 2026.
External accounts also appeared manageable. A modest current-account deficit, combined with improved financial inflows and support from the IMF programme, helped lift foreign-exchange reserves to a more comfortable level. Remittances surged to $26.5bn, providing a crucial buffer.
Yet beneath this recovery lay structural weaknesses. Revenue collection lagged behind targets, exports declined while imports rose, and portfolio investment continued to retreat. Equity markets also reflected unease, with falling valuations and shrinking market capitalisation.
The outbreak of war in the Middle East has now complicated this fragile picture. Oil prices have jumped sharply-from around $64 per barrel before the conflict to over $110-triggering a steep increase in domestic fuel costs. This has already fed into inflation, with further rises expected if global supply disruptions persist.
Higher fuel prices carry a double burden. They directly raise household expenditure while also increasing transport and production costs across sectors. Estimates suggest that recent price adjustments alone may add up to five percentage points to inflation, potentially pushing it back into double digits.
The impact on growth could be severe. Key sectors such as textiles, fertiliser and power generation are heavily reliant on imported energy. Even a modest reduction in fuel availability could shave close to two percentage points off GDP, reversing recent gains.
External balances are equally vulnerable. Rising oil prices may add over $1bn a month to the import bill. At the same time, remittance inflows-more than half of which originate from the Middle East-could weaken if oil-dependent economies in the region slow down.
Trade performance is already under strain. Exports have declined while imports have increased, widening the trade gap. Higher energy costs risk further eroding competitiveness, particularly in textiles, Pakistan's key export sector.
Policymakers face difficult choices. The government has introduced subsidies to cushion consumers, but sustaining them will require fiscal adjustments. Suggestions include higher taxation on affluent households, tighter control of non-essential imports and coordination with the IMF on fiscal flexibility.
Business leaders argue that deeper structural reforms are overdue. Expanding the tax base, addressing energy shortages and improving export competitiveness are seen as essential to convert short-term stability into durable growth.
For now, Pakistan's economy stands at a precarious juncture. The gains of recent months-though notable-remain vulnerable to external shocks. Much will depend on the trajectory of the Middle East conflict and the country's ability to navigate its consequences without derailing an already fragile recovery.