Pakistan faces a potential economic shock of up to $68 billion if the conflict in the Middle East persists and the Strait of Hormuz remains closed, as per a presentation by the Policy Research Institute of Market Economy (PRIME) to the National Assembly Standing Committee on Finance. The estimated economic cost in the best-case scenario, with quick easing of hostilities and the reopening of the Strait of Hormuz, is around $10 billion, equivalent to 2.5% of Pakistan’s GDP.
If the conflict extends for another three months, the economic burden could rise significantly to between $24 billion and $32 billion, nearly 8% of the GDP. In the worst-case scenario, involving a prolonged closure of the strategic waterway and a surge in crude oil prices to $150 per barrel, the total cost could escalate to between $50 billion and $68 billion, nearly 17% of GDP.
PRIME’s analysis primarily focuses on the impact on Pakistan’s external sector, including increased import costs, reduced exports, and lower remittance inflows. The report warns that these factors could weaken the country’s balance of payments and deplete foreign exchange reserves, potentially leading to a financial crisis despite the presence of an IMF program.
Inflationary pressures are also expected to rise, with estimates suggesting inflation could reach around 10% even in the mild scenario. In a prolonged crisis, inflation could surge to between 15% and 18%, driven by currency depreciation, and escalating food and energy prices.
