Page 38 - CMA Journal (Mar-Apr 2026)

Literature Review the ensuing closure of the Strait of Hormuz on the same
date, triggered a sudden re-evaluation of the
The nexus between geopolitical risk (GPR) and international energy benchmarks. The con ict saw the
macroeconomic instability in emerging economies has price of Brent crude crept over $105 per barrel within
attracted signi cant academic interest. Caldara and days, and intraday spikes hit $115-116 per barrel, in early
Iacoviello (2022) constructed a GPR index that shows a March 2026 (Qadir, 2026; Lokmat Times, 2026). At the
strong negative relationship between increased geopolitical same time, the price of imported LNG rose to $8.72 per
tensions and economic activity in developing countries. In MMBtu, driven by disruptions in Qatari gas elds (Trade
the case of net-energy importers, the major transmission Chronicle, 2026).
mechanism is in the form of commodity price shocks and In case of Pakistan, it corresponded to an immediate and
consequent exchange rate pressures (Ahmed et al., 2023). signi cant growth of the import bill. According to an
analysis conducted by the Pakistan Institute of
The country-speci c studies based on research in Pakistan
Development Economics (PIDE), every ten dollar rise in
have been pointing to the asymmetric and pernicious
world oil prices adds about $1.8-2.0 billion per year to
impact of external shocks on the macroeconomic
Pakistan's petroleum import bill (Qadir, 2026). With
fundamentals of the nation. Sardar and Hyder (2022) set up
crude prices potentially staying at $120-150 per barrel in
in SBP Working Paper, that the origin of the oil price shock
the long run, the monthly import bill in Pakistan might
would have a signi cant in uence on in ation dynamics,
hit between $3.5-4.5 billion which will quickly deplete
with geopolitical supply shocks showing more persistent
the foreign exchange reserves and put a tremendous
and pronounced effects on domestic pricing than demand-
strain on the rupee.
induced oil price increases. This observation is especially
2) Exchange Rate and Competitiveness: Before the war,
relevant to the interpretation of the 2026 war, which is a
the Pakistani Rupee had been relatively stable at around
canonical supply shock caused by the destabilization of key
PKR 280/USD with the help of tight monetary policy,
maritime transport corridors.
favourable interest-rate spread, and IMF disbursements
In addition, a granular analysis by the Modelling Lab of (Mettis Global, 2026). Nonetheless, a sharp rise in the
Lahore School of Economics (2025) of the effect of external import bill due to the war on the one hand, and a
shocks on the prices of retail and wholesale products in worsening of the current account, which had already
Pakistan showed that the exchange rate has the greatest accumulated a new de cit of $1.17 billion in the rst half
pass-through effect on domestic in ation compared to all of FY26, on the other, has put the rupee under renewed
other external factors. This empirical evidence is supported pressure.
by a larger work on the South Asian economies and has Although the rupee has not (as of April 2026) fallen, like
established that exchange rate pass-through (ERPT) is less in 2023, in a dramatic collapse, it is balancing on a
than complete in the short run, however, in countries with tightrope between stability and gradual decline (Mettis
high import coefficients and low monetary policy credibility, Global, 2026). Intervention by the State Bank of Pakistan
the pass-through tends to be higher and more complete (SBP) has helped to smooth volatility and anchor
(Springer, 2023). Within the speci c circumstances of expectations but pressures are also mounting in the
Pakistan, analysts have estimated that a 1 percent background. Fitch Ratings had already estimated a
depreciation in the exchange rate leads to a 0.41 percent rise gradual depreciation of the PKR to PKR 295, upon
in in ation in the rst six months, peaking at 0.30 percent in completion of scal year 2026 (Pakbanker, 2025), and
the 12th month (INP, 2024). the war is likely to accelerate that rate. According to the
observers, the IMF forecast on 2025-26 is projected to
Hasnat and Siddiqui (2025) have provided a strict analysis of
have the rupee plummeting by over 12 percent by June
the role of geopolitics in triggering foreign exchange crisis in
2026 (Lokmat Times, 2026).
Pakistan and demonstrated that the fall of Kabul in 2021 was
The connection between oil prices and currency
a major cause of the FX crisis in 2022-2023. Their results
devaluation is thoroughly developed in the literature.
highlight that political and military shocks in the vicinity of
The SBP studies have shown that the real effective
Pakistan promptly translate into capital ight, loss of foreign
exchange rate (REER) devalued in response to a rise in
currency in the formal banking system and an increase in
global oil prices, even at times when the world is
pressure on the rupee.
recovering after oil prices have fallen (SBP, 2024). A
Empirical Analysis: Mechanisms of Transmission declining rupee, conversely, increases the price of
imports to the country such as fuel, machinery and
of 2026 US-Iran Shock intermediate inputs and thus fuelling in ation and
1) Energy Price Channel: The US and Israeli assaults on creating a vicious cycle of currency weakness and price
Iranian energy infrastructure on 28 February 2026 and shocks.

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