Amid regional turmoil, Pakistan’s modest economic recovery is at jeopardy.

Officials and independent economists warned on Saturday that if Israel-US strikes on Iran turn into a larger regional confrontation, they might jeopardise oil supplies and remittance flows that are essential to Pakistan’s nascent economic recovery.

After weeks of escalating tensions, the United States and Israel launched an attack on Iran, while Pakistan has recently seen a resurgence of border violence with Afghanistan.

Given that Pakistan depends largely on Gulf states for imported fuel and worker remittances, which are expected to total $41 billion this fiscal year, analysts caution that a larger Middle East conflict could swiftly undermine the country’s hard-won macroeconomic gains under a $7 billion IMF program.

Iran has already attempted to attack US military installations in the area by targeting a number of neighbouring nations, sparking concerns about a wider escalation and prompting condemnation from regional leaders, notably Pakistan.

Muzzammil Aslam, the finance minister of Pakistan’s northwest Khyber Pakhtunkhwa province, which borders Afghanistan, told Arab News on the phone that “Pakistan’s western borders are in a state of war.” Exports from Pakistan are unlikely to be impacted because of the restricted commerce with western borders. However, the remittances will undoubtedly be impacted if the conflict spreads throughout the Middle East.

Aslam cautioned that possible supply disruptions could potentially cause energy costs to rise.

When asked for their thoughts on the matter, Pakistan’s finance adviser Khurram Schehzad and the ministry’s spokesperson Qamar Sarwar Abbasi did not reply.

But after years of deficits, the net oil importer has only recently reported a slight current account surplus, aided by increased remittances and import compression. After reaching a peak of 38% in May 2023, inflation has now decreased to single digits.

A prolonged spike in crude prices, according to experts, might undo such benefits.

According to analyst Farrukh Saleem, “Pakistan is likely to feel it immediately if the Iran-US conflict escalates and oil moves sharply higher.” “A rise in crude materially weakens the rupee, strains the current account, and increases the import bill.”

The State Bank of Pakistan maintained its policy rate at 10.5 percent in January, but he stated that such a scenario would encourage inflation and restrict its ability to lower it.

He went on to say, “The tensions between Pakistan and Afghanistan are more about security.” “They strain fiscal space, delay investment, and increase national risk, but they don’t move oil.”

In response to a query, Saleem stated that he did not believe there was an imminent crisis in the balance of payments.
“Sharp opening strikes, controlled retaliation, and backchannel de-escalation have been the pattern of most Middle East conflicts since 2006,” he stated.

Haroon Sharif, the former state minister for investment, cautioned that sustained instability would undermine investor trust.

“Capital outflows will result from a protracted conflict,” he stated.

Pakistan International Airlines has redirected flights to Saudi Arabia and suspended flights to the United Arab Emirates, Bahrain, Doha, and Kuwait due to regional tensions.

“Since a single flight can cost us up to Rs2 million, the financial impact of these flight suspensions can reach millions of rupees,” PIA spokesperson Abdullah Hafeez Khan told Arab News.

“Given the current circumstances, we can safely say that domestic carriers are expected to lose millions of rupees,” he continued.

According to Aslam, KP’s economic advisor, Pakistan should continue to handle the ongoing tensions with tact.

“One can say the risk of that crisis remains given the remittances and oil prices are correlated with the balance of payments,” he continued.