Iran war price shocks could derail Pakistan’s IMF program— report

ISLAMABAD: Commodity price shocks from the Iran war have exposed Pakistan’s external vulnerabilities and can even derail the country’s $7 billion International Monetary Fund (IMF) loan program, global economic advisory firm Oxford Economics said in a report this week. 

Pakistan depends mainly on fuel imports from the Middle East for its energy needs. The US-Israel war against Iran, which began in February, has rattled global trade and energy supplies. Tensions in the Strait of Hormuz have pushed oil prices higher and increased import costs for countries like Pakistan.

Pakistan has increasingly sought to strengthen its economic reserves and bring about stability in its external financing position via a 37-month, $7 billion IMF loan program. 

“The commodity price shock from the US-Israel war with Iran is exposing Pakistan’s external vulnerabilities and could delay or even derail the IMF’s $7 billion program,” Oxford Economics said in its research briefing report on Monday. 

It noted that as an importer of fuel that heavily relies on LNG from the Gulf region, Pakistan is exposed to higher global oil and gas prices and supply shortages.

The report noted that Islamabad also relies heavily on Gulf-linked trade and remittance inflows. It added that this combination of factors increases pressure on Pakistan’s external position through a higher import bill and weaker foreign exchange inflows. 

“Under our new baseline commodity price assumptions, we estimate Pakistan’s foreign reserves will decline to $6.8 billion by the end of 2026 (from pre-war $20.8 billion) and approach $1.6 billion in FY2028,” Oxford Economic said. 

Oxford Economics said it assumes the global price of oil will average at $113 per barrel in the second quarter of 2026, before easing to $79 per barrel by the fourth quarter of the current year, alongside higher gas and broader commodity prices.

It said these estimates do not assume any deterioration in remittance inflows or import compression.

Pakistan’s economy heavily relies on remittances from overseas nationals, mostly in the Gulf region. The report said that the Iran war poses key downside risks to these remittance inflows, due to the economic impact of the war on these Gulf states and the labor markets.

“If remittances were to decline, foreign reserves would deplete even more severely, further underscoring Pakistan’s external fragility,” it added. 

Oxford Economics said it anticipates Pakistan to compress imports through a combination of demand destruction and potentially explicit import restrictions, adding that it has used this approach in past balance of payments shocks. 

“While these measures would lower the import bill and ease immediate pressure on reserves, this response would likely intensify supply shortages, fuel inflation and weigh on growth,” it warned.