Summary
- Pakistan’s economy faces mounting risks from the prolonged Middle East conflict, with the International Monetary Fund (IMF) warning of a regional economic contraction and the World Bank cautioning that higher energy prices could further strain the country’s fragile economic position.
- In its latest regional outlook released on Thursday, October 22, the IMF projected a 1.3 per cent contraction in the combined economic output of the Middle East, North Africa and Pakistan in 2026.
- The forecast reflects the impact of the ongoing US-Israeli-led war against Iran, which has disrupted energy production, shipping, tourism and international trade.\ Although the IMF expects economic activity to rebound by 6.6 per cent in 2027, the recovery depends on the conflict easing in early 2027 and trade gradually returning to normal.
Pakistan’s economy faces mounting risks from the prolonged Middle East conflict, with the International Monetary Fund (IMF) warning of a regional economic contraction and the World Bank cautioning that higher energy prices could further strain the country’s fragile economic position.
In its latest regional outlook released on Thursday, October 22, the IMF projected a 1.3 per cent contraction in the combined economic output of the Middle East, North Africa and Pakistan in 2026. The forecast reflects the impact of the ongoing US-Israeli-led war against Iran, which has disrupted energy production, shipping, tourism and international trade.\
Although the IMF expects economic activity to rebound by 6.6 per cent in 2027, the recovery depends on the conflict easing in early 2027 and trade gradually returning to normal. The fund warned that further disruptions to energy supplies and shipping routes could worsen the outlook.
Separately, the World Bank has highlighted Pakistan’s particular vulnerability because of its heavy dependence on imported petroleum and gas. In its latest Pakistan Development Update, titled Attaining Escape Velocity, the bank identified a prolonged or intensified Middle East conflict as the biggest risk to the country’s near-term economic outlook.
According to the report, petroleum and gas products accounted for approximately one-quarter of Pakistan’s total imports in fiscal year 2025, equivalent to 3.7 per cent of gross domestic product. Gulf Cooperation Council countries supplied around 80 per cent of these energy imports, leaving Pakistan exposed to regional supply disruptions and international price fluctuations.
The World Bank reported that Pakistan’s petroleum import volume increased by 9.2 per cent year-on-year during January-June 2026, while the crude petroleum import bill surged by 46.4 per cent over the same period.
A sustained increase in global oil and gas prices could widen Pakistan’s current account deficit, raise import costs and place additional pressure on foreign exchange reserves. Higher fuel prices may also increase transportation, electricity and production costs, pushing up inflation and reducing household purchasing power.
The World Bank has additionally warned that adverse weather conditions linked to a stronger-than-expected El Niño could affect agricultural production and economic growth. While its baseline forecast puts Pakistan’s real GDP growth at 3.8 per cent in fiscal year 2027, a scenario involving zero growth in crop output could reduce the rate to 3.6 per cent.
The IMF has urged policymakers across the region to prioritise price stability, maintain fiscal sustainability, safeguard central bank independence and introduce structural reforms to improve productivity and create employment.
For Pakistan, the twin challenges of external energy shocks and climate-related risks underscore the need to strengthen economic resilience, diversify energy sources and protect vulnerable households from rising living costs.
