Pakistan faces economic crisis as Middle East conflict disrupts shipping through Strait of Hormuz, fuel prices surge 20¬ross country
Pakistan is facing a serious economic crisis as the ongoing Iran-US conflict is affecting oil supplies through the Strait of Hormuz, the route through which Pakistan receives most of its fuel imports. With the reduction of oil tankers passing through the Strait of Hormuz due to the attacks on the ships in the Persian Gulf, near the Karachi port, the fuel prices are now affecting daily lives across the country. The government has already increased the fuel prices by 20% on 6th March to stop the panic buying of fuel. But the results of the increase in fuel prices are already affecting the citizens of the country. Oil supply disruptions hit Pakistan hard Pakistan depends heavily on imported energy. More than 85 % of its crude oil is imported from Saudi Arabia and the United Arab Emirates, and most of it is shipped through the Strait of Hormuz. The current conflict in the region has made that route extremely risky. Since late February, at least 16 ships, including oil tankers, have been attacked in the Persian Gulf. Because of these security risks, Oil tanker movement has slowed down, and several ships are waiting near Karachi, which is a major economic hub of Pakistan. The disruption has quickly reduced fuel supplies inside the country. To manage the situation, authorities have taken several emergency steps, such as promoting remote work, transitioning some schools to online classes, reducing official travel, and even considering a four-day workweek. Pakistan has also requested Saudi Arabia to ship oil through its Red Sea ports as an alternative route. On the other hand, the government is counting on local power sources such as solar power to help alleviate the problem caused by the shortage of imported liquefied natural gas (LNG). Rising fuel prices hit farmers and workers hard The recent rise in fuel prices has had significant impacts on the lives of both rural and urban populations. Agriculture forms the most important sector of the Pakistani economy, as the sector contributes more than 23% of the country’s GDP and employs 37% of the national labour force. Farmers plan to gear up for the spring harvest and claim that the rise in diesel fuel prices will add to the cost of operating tractors and other farming equipment, as well as the cost of transporting the crops to the markets. Aamer Hayat Bhandara, a farmer from the Pakpattan region of Punjab province, stated that most aspects of the cultivation process depend on the fuel required for the farming equipment. City workers are also facing similar problems. The taxi and rickshaw drivers claim that their daily earnings are reducing because the price of fuel is rising, while the demand is unpredictable. Muhammad Roshan, a rickshaw driver in Rawalpindi, questioned the government’s approach and said Pakistan should have explored alternative oil supplies from countries like Russia. Inflation and economic growth are under threat Economists warn that if oil prices remain around $100 per barrel or higher, Pakistan’s economy could face serious consequences. Former finance minister Hafiz Pasha has estimated that Pakistan’s GDP could fall by 1 to 1.5 % if the conflict continues. The biggest pressure on the economy is likely to come from Pakistan’s external sector. Petroleum imports could increase by 25 to 30 % as global oil prices rise. At the same time, shipping and insurance costs for cargo vessels have climbed sharply due to growing security risks in the region. Together, these factors could add between $12 billion and $14 billion to Pakistan’s external payments over the next year. Higher oil prices also contribute to increasing inflation. Earlier this year, inflation was around 7%, but it has already crossed 10%. If oil prices go higher in the global market and reach $120 per barrel, as is expected, similar to when there was a conflict between Russia and Ukraine, inflation in Pakistan is expected to reach levels of 30%. The three sectors that will be most affected by the crisis are transport, industry, and agriculture. Fuel prices will not only lower the demand for transport, but disruptions in LNG supplies will also affect industries such as fertiliser, cement, and textiles. Pressure on Remittances and Foreign Reserves Pakistan is also facing a risk of a decrease in remittances. As much as 55 % of remittances received by Pakistan from overseas Pakistanis is contributed by Pakistanis employed in the Middle East countries. If the economies of countries in the Gulf, which are dependent on oil exports, experience a slowdown because of a decline in exports, overseas workers, including Pakistanis and Bangladeshi workers, are likely to lose jobs or be repatriated to their countries. Economists believe that this would result in a decline of $2 billion to $4 billion in remittances to Pakistan. As a result of an increase in import costs, Pakistan’s present deficit of $2 billion is likely to increase to between $
Pakistan is facing a serious economic crisis as the ongoing Iran-US conflict is affecting oil supplies through the Strait of Hormuz, the route through which Pakistan receives most of its fuel imports. With the reduction of oil tankers passing through the Strait of Hormuz due to the attacks on the ships in the Persian Gulf, near the Karachi port, the fuel prices are now affecting daily lives across the country.
The government has already increased the fuel prices by 20% on 6th March to stop the panic buying of fuel. But the results of the increase in fuel prices are already affecting the citizens of the country.
Oil supply disruptions hit Pakistan hard
Pakistan depends heavily on imported energy. More than 85 % of its crude oil is imported from Saudi Arabia and the United Arab Emirates, and most of it is shipped through the Strait of Hormuz.
The current conflict in the region has made that route extremely risky. Since late February, at least 16 ships, including oil tankers, have been attacked in the Persian Gulf. Because of these security risks, Oil tanker movement has slowed down, and several ships are waiting near Karachi, which is a major economic hub of Pakistan.
The disruption has quickly reduced fuel supplies inside the country. To manage the situation, authorities have taken several emergency steps, such as promoting remote work, transitioning some schools to online classes, reducing official travel, and even considering a four-day workweek.
Pakistan has also requested Saudi Arabia to ship oil through its Red Sea ports as an alternative route. On the other hand, the government is counting on local power sources such as solar power to help alleviate the problem caused by the shortage of imported liquefied natural gas (LNG).
Rising fuel prices hit farmers and workers hard
The recent rise in fuel prices has had significant impacts on the lives of both rural and urban populations.
Agriculture forms the most important sector of the Pakistani economy, as the sector contributes more than 23% of the country’s GDP and employs 37% of the national labour force. Farmers plan to gear up for the spring harvest and claim that the rise in diesel fuel prices will add to the cost of operating tractors and other farming equipment, as well as the cost of transporting the crops to the markets.
Aamer Hayat Bhandara, a farmer from the Pakpattan region of Punjab province, stated that most aspects of the cultivation process depend on the fuel required for the farming equipment. City workers are also facing similar problems. The taxi and rickshaw drivers claim that their daily earnings are reducing because the price of fuel is rising, while the demand is unpredictable.
Muhammad Roshan, a rickshaw driver in Rawalpindi, questioned the government’s approach and said Pakistan should have explored alternative oil supplies from countries like Russia.
Inflation and economic growth are under threat
Economists warn that if oil prices remain around $100 per barrel or higher, Pakistan’s economy could face serious consequences. Former finance minister Hafiz Pasha has estimated that Pakistan’s GDP could fall by 1 to 1.5 % if the conflict continues. The biggest pressure on the economy is likely to come from Pakistan’s external sector.
Petroleum imports could increase by 25 to 30 % as global oil prices rise. At the same time, shipping and insurance costs for cargo vessels have climbed sharply due to growing security risks in the region. Together, these factors could add between $12 billion and $14 billion to Pakistan’s external payments over the next year.
Higher oil prices also contribute to increasing inflation. Earlier this year, inflation was around 7%, but it has already crossed 10%. If oil prices go higher in the global market and reach $120 per barrel, as is expected, similar to when there was a conflict between Russia and Ukraine, inflation in Pakistan is expected to reach levels of 30%.
The three sectors that will be most affected by the crisis are transport, industry, and agriculture. Fuel prices will not only lower the demand for transport, but disruptions in LNG supplies will also affect industries such as fertiliser, cement, and textiles.
Pressure on Remittances and Foreign Reserves
Pakistan is also facing a risk of a decrease in remittances. As much as 55 % of remittances received by Pakistan from overseas Pakistanis is contributed by Pakistanis employed in the Middle East countries.
If the economies of countries in the Gulf, which are dependent on oil exports, experience a slowdown because of a decline in exports, overseas workers, including Pakistanis and Bangladeshi workers, are likely to lose jobs or be repatriated to their countries.
Economists believe that this would result in a decline of $2 billion to $4 billion in remittances to Pakistan.
As a result of an increase in import costs, Pakistan’s present deficit of $2 billion is likely to increase to between $6 billion and $7 billion during the next fiscal year. The scenario is likely to repeat itself as it was during the financial crisis of 2021-22, when foreign exchange reserves fell to nearly $4 billion.
Pakistan’s economic stability at present depends heavily on financial assistance from the International Monetary Fund (IMF). Economist Kaiser Bengali says even a $1 billion IMF instalment can make the difference between survival and economic collapse.
Daily life is becoming more expensive
The fuel shock is also affecting the daily life of the citizens of Pakistan.
Many workers who used to share rickshaw fares are now walking long distances to save money. Others who use motorcycles to go to work say the money they receive is no longer enough to cover the cost of petrol.
The retail markets are also experiencing the slowdown of the economy ahead of the Eid al-Fitr celebrations, which is usually one of the biggest shopping seasons of the year.
According to Shabbir Ahmed, who owns a clothing store in Karachi, the festivities are yet to be seen in the markets.
Ali Akbar, an employee at a real estate company in Islamabad earning about $400 per month, said his family has already started cutting expenses. He plans to cancel his usual trip home for Eid and is considering shifting his children to a school closer to home because transportation costs have jumped from $36 to $48 per month within a week.
Online classes have also created problems for many families. Nearly half of Pakistan’s 250 million people live below the poverty line, and many households do not have laptops, tablets or reliable internet connections.
An energy crisis could force policy changes
Experts believe that the crisis may compel Pakistan to reconsider its long-term energy policies.
For every $10 hike in global oil prices, Pakistan’s import bill goes up by an additional $1.5 billion annually. As long as oil prices are higher than the previous rate of $80 per barrel by at least $20, Pakistan’s import bill will go up by an additional $3 billion.
Some economists recommend daily adjustment of fuel prices to respond to global market changes. This would also address the issue of hoarding. Another recommendation is to ration petrol or to increase rail transport to cut down on diesel consumption by as much as 20 %.
Pakistan might have to rely more on its own energy resources, which include hydropower, nuclear energy, local coal, local gas, wind, and solar energy. However, there is a lack of transmission infrastructure to support these resources.
Risk of a larger regional crisis
In addition to the economic concerns, there is also the fear of the larger conflict. Pakistan has defence ties with Saudi Arabia. This may force the country to take a stance if the relations between Saudi Arabia and Iran worsen.
On the other hand, there is the fear of the United States wanting to use the Pakistani bases to launch attacks on Iran. In such a case, the country would be at the mercy of Iran.
For now, the biggest problem is economic survival. With fuel prices on the rise, the already struggling economy of the country is facing one of its biggest challenges.
