Middle East conflict threatens remittances, oil supply as Pakistan faces inflation and trade risks

Escalating tensions in the Middle East following US and Israeli strikes on Iran are raising concerns over economic spillovers for Pakistan, with analysts warning of higher oil prices, rising inflation and renewed strain on the external account.

Global crude markets reacted sharply amid fears of disruption to the Strait of Hormuz, which carries more than 20% of global seaborne oil trade. Brent crude climbed around 7–9% to approximately $78–79 per barrel in early trading, with some analysts cautioning that prices could move toward $90–100 if hostilities intensify or shipping routes are further disrupted.

Pakistan, which relies heavily on imported energy, faces exposure to higher fuel costs at a time when inflation has started to pick up again. Average inflation for July–January FY26 stood at 5.2%, while February inflation rose to around 7%, indicating renewed price pressures.

The country imports more than $5.7 billion worth of crude petroleum annually, mainly from Saudi Arabia and the United Arab Emirates. Including refined products, total petroleum imports reached about $10.7 billion in FY25, highlighting dependence on Middle Eastern energy supplies.

The trade deficit has already widened to approximately $25 billion during July–February FY26. Business leaders said higher freight and insurance costs are adding to the burden. 

Shipping diversions around the Cape of Good Hope due to security risks in the Red Sea are extending transit times for exports to Europe, the United Kingdom and the United States by 15–20 days. Freight rates on key routes could rise by up to 300%, while marine insurance premiums have increased under war-risk classifications.

The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) urged the government to consider measures to shield trade and industry, including building strategic petroleum reserves, securing deferred-payment oil facilities and arranging contingency supply agreements.

FPCCI representatives also called for targeted support to offset logistics and insurance costs, suggesting coordination between the commerce ministry and the State Bank of Pakistan to manage the impact on exporters.

Economists warned that sustained high oil prices could complicate monetary policy. Analysts noted that further increases in energy costs may limit the scope for policy rate reductions and could exert additional pressure on the current account.

Financial markets have reflected these concerns, with the Pakistan Stock Exchange recording sharp declines following the escalation, as investors assessed the potential impact of higher oil prices and external sector risks.

Analysts said prolonged instability in the Gulf could affect not only trade and energy imports but also remittance flows from the region, adding another layer of uncertainty to Pakistan’s economic outlook.