If the conflict in Iran prolongs, Pakistan’s economy could face a severe blow, warns a report. Pakistan is highly vulnerable to the repercussions of the war due to its heavy reliance on imports from West Asia for fuel and food, as well as significant remittances from the Gulf region. The timing is unfortunate as Pakistan’s economy is already strained from four years of stabilization efforts, including a cost-of-living crisis and income decline.
Pakistan’s susceptibility is exacerbated by its limited capacity to respond to external shocks. With less than three months of import cover and thin foreign exchange reserves, the country is ill-prepared. The public debt burden, amounting to 70% of GDP, and high gross financing needs leave little room for proactive measures in the face of economic challenges.
Rising prices of essential commodities like oil, gas, and fertilizers are expected to escalate transport and food expenses, potentially triggering a recession. A prolonged economic slowdown in West Asia could adversely affect remittances and external financing, while regional instability may intensify pressure on the Pakistani currency, leading to inflation.
Despite hopes that the current IMF program could mitigate the impact, it may not be sufficient. The program, aimed at averting default, faces limitations due to Pakistan’s extensive borrowing history. In the absence of robust buffers, the IMF program is projected to remain restrictive amid a surge in commodity prices, posing challenges for the economy.
In response to the crisis, fiscal austerity, higher interest rates, and currency depreciation seem inevitable. However, this policy mix could exacerbate the economic slowdown when breathing space is crucial. Such measures may fail to shield the most vulnerable segments of society from the adverse effects of stagflation. An alternative approach involving targeted fiscal and monetary stimuli, foreign exchange interventions, and temporary import restrictions is suggested for a more effective and safer response.
