Pakistan faces higher energy costs, inflation if US-Iran tensions flare again, EAD warns

The Economic Affairs Division (EAD) has warned that any fresh escalation between the United States and Iran could raise Pakistan’s energy costs, fuel inflation, increase external financing requirements and slow economic growth.

The assessment was shared with the National Assembly Standing Committee on Economic Affairs Division, chaired by Mirza Ikhtiar Baig.

The EAD team told the committee that Pakistan entered 2026 with improved macroeconomic indicators. However, conflict in the Middle East and the temporary closure of the Strait of Hormuz disrupted global energy markets, pushed up oil prices and added to supply chain and inflationary pressures.

The division said international oil prices had eased and maritime trade had largely resumed following the ceasefire and the Islamabad Memorandum of Understanding. It cautioned, however, that regional risks remained and renewed hostilities could again put pressure on Pakistan’s economy.

The committee also raised concerns over the proposed financing structure for the multi-billion-rupee Lyari Elevated Freight Corridor.

Members noted that the project cost under the proposed Korean Exim Bank financing arrangement was nearly twice the estimate prepared by the National Highway Authority.

The committee advised the government to assess all cost-effective options before accepting stringent loan conditions. It is recommended that the EAD secretary hold consultations with the National Highway Authority, the Ministry of Planning, Development and Special Initiatives, and the Karachi Port Trust to develop a financially viable model.

The panel also expressed concern over delays and cost overruns in the Karachi Greater Water Supply Project, commonly known as K-IV.

It was informed that only Rs10 billion had been allocated against an estimated requirement of Rs78 billion, leaving a funding gap of Rs68 billion.

Members said the shortfall could delay completion of the project and further postpone the provision of additional water supplies to Karachi.

The committee directed the Ministry of Water Resources and the K-IV project director to give a detailed briefing at the next meeting on the project’s progress, funding needs, completion schedule and steps being taken to address existing constraints.

The committee was also briefed on Tranche-III of the Central Asia Regional Economic Cooperation project. It was informed that the National Highway Authority had awarded the contract and that completion was targeted for December 2027.