Page 31 - CMA Journal (Mar-Apr 2026)

Petroleum prices in Pakistan responded quickly due to the Slow global cost transmission through tax adjustments or
fuel pricing system (which is based on the average Platts subsidies can protect consumers from abrupt in ation but
benchmark prices of petroleum products during the pricing burdens the government's budget, while faster transmission
period) and limited scal capacity to subsidize or cut taxes on maintains scal discipline but exposes households to
retail prices. Furthermore, the severity of the crisis led the in ationary pressures. In Pakistan, the government opted for
government to adjust domestic prices within a week, faster transmission, which will lead to higher in ation. It is
breaking its usual fortnightly schedule. also evident from the in ation estimates released by the
The con ict affected nearly all Asian countries, with Pakistan Pakistan Bureau of Statistics: month-on-month in ation
experiencing the highest increases in petrol and diesel increased by 1.2% in March 2026 and by 7.3% year-on-year
prices. All raised prices, except for a few, e.g., India and compared to March 2025. These in ationary pressures could
Bangladesh, but the magnitude of increase remains smaller. have signi cant implications for Pakistan, which has one of
The main difference between these countries and Pakistan the lowest per capita incomes in the region.
(and Cambodia) is that other Asian countries have strong Pakistan's external sector is fragile, with exports far below
currencies, substantial foreign reserves, and stable imports, resulting in a persistent trade de cit. This energy
economies. shock will increase its import bill, widening the trade de cit
In addition, countries that prepare for potential crises by and straining (limited) foreign reserves ($21.8 billion,
building strategic petroleum reserves (SPR), not just including commercial banks' reserves, as of March 27, 2026).
commercial stocks, appear less affected by the con ict, e.g., These reserves could provide approximately 2.5 months of
Japan, China, and South Korea. In contrast, Pakistan has only import cover, below the recommended 3 months.
20 days of operational inventories and no formal SPR, Furthermore, Pakistan is expected to face increasing
making it more vulnerable. SPR enhances energy security, at pressure in the coming months as $5.3 billion in external
least in the short term. debt obligations are due ($4 billion to the UAE, an amount
In addition, countries that prepare for potential crises by held by SBP for several years, and $1.3 billion as the 10-year
building strategic petroleum reserves (SPR), not just Eurobond matures). If this amount is fully paid and there are
commercial stocks, appear less affected by the con ict, e.g., no new in ows, it could drain about one-third of SBP's
Japan, China, and South Korea. In contrast, Pakistan has only reserves.
20 days of operational inventories and no formal SPR, In the medium term, if the ongoing crisis continues, it is
making it more vulnerable. SPR enhances energy security, at expected to trigger a global recession, which will create dual
least in the short term. pressure on Pakistan's external sector, as both exports and
On the supply side, Pakistan responded swiftly and secured remittances are likely to decline, widening the current
crude and petroleum product supplies from alternative account de cit. Remittances have supported Pakistan's
sources and maritime routes; re neries operated at near- foreign reserves, reaching $26.49 billion in the rst eight
maximum capacity (80-100%). This helped delay immediate months of FY2026, a 10.5% increase (SBP, 2026). However, a
shortages but could not eliminate import dependence. decline is expected due to issues in the UAE, Saudi Arabia,
and Western countries, potentially leading to a loss of $1
Macro Risks for Pakistan
billion to $4 billion annually (Farooq, 2026).
Pakistan has been facing severe economic imbalances for Exports have already fallen by 14.4% in March 2026 (PBS,
years, leading to an immense burden of interest payments
2026); the crisis may decline them further. The main
and external debt obligations. The total public debt stock has
exporting sector — textiles — is under stress due to high
reached PKR 81.4 trillion, of which 32% is the external debt. energy costs and gas rationing. To address the balance-of-
Interest payments are consuming a major share of national payments crisis and declining foreign reserves, the
revenue (PKR 8.2 trillion) (FD, 2026). Recent policies (under
government may impose import restrictions, similar to those
the IMF program), lower oil prices, and debt rollovers from
implemented after the Ukraine war in 2023, which could
friendly countries — all helped in stabilizing the economy.
further slow production and increase unemployment.
The recent con ict has become a signi cant test not only for
the energy system but for the entire economy; the economy The pressure on foreign reserves due to higher import
has already been struggling with GDP growth stagnating at payments may weaken the Pakistani Rupee. Also, if domestic
around 2 to 3% (Malik, 2026). in ation rises faster than global in ation, exports will
A greater reliance on imported energy is often associated become less competitive, causing the nominal exchange
with weaker GDP performance, particularly during periods rate to fall. When foreign reserves fall, interest rates usually
of high global fuel prices, e.g., the energy shock following the rise sharply, as lower reserves signal higher economic risk
Ukraine War (Figure 8). Increased import bills lead to a larger and trigger cost-push in ation. Unlike in ation driven by
current account de cit, budgetary and exchange rate demand, higher interest rates cannot control in ation
pressures, higher in ation, and increased production costs, caused by supply issues.
which can slow economic growth.

ICMA’s Chartered Management Accountant, Mar-Apr 2026 29