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May 01, 2026
Pakistan’s IMF-backed Recovery under Pressure as US-Iran Mediation StallsIslamabad: Pakistan ’s bid to mediate between the US and Iran has put Islamabad near the center of efforts to defuse the Middle East conflict, but with no lasting peace yet in sight, its fragile economy is becoming increasingly exposed to the fallout from the war.
While soaring oil prices and disrupted flows through the Strait of Hormuz have led to turmoil in global energy markets, analysts said Pakistan has especially limited room to absorb the blow because of its thin foreign exchange reserves, dependence on imported energy and reliance on IMF -backed reforms.
With peace efforts stalled after a temporary ceasefire earlier in April, one potential source of relief has faded, leaving Islamabad facing a rising import bill, tighter external financing and more conditional support from Gulf partners at a time when domestic energy curbs could weigh on growth.
A report by Oxford Economics warned that higher oil prices could quickly erode the country’s foreign exchange buffers if imports and remittances do not adjust.
Callee Davis, senior economist at Oxford Economics, said the firm’s updated forecast assumed oil would average US$113 per barrel in the second quarter of 2026 before easing to US$79 by the end of the year.
Under that scenario, and with no change in imports or remittance behavior, Pakistan’s reserves would “deteriorate sharply”, falling to US$6.8 billion by the end of 2026 and approaching US$1.6 billion by the 2028 financial year, Davis said.
The blockade of the Strait of Hormuz has choked off flows of crude, natural gas and oil products since the war began at the end of February, pushing Brent crude briefly past US$126 per barrel on Thursday, its highest level in four years, from about US$70 before the conflict.
The disruption has raised costs for energy importers such as Pakistan, even as the US expands pressure on Tehran by targeting Iran-linked oil tankers and buyers of Iranian crude.
Pakistan has implemented sweeping austerity and fuel conservation measures to reduce oil imports and curb energy consumption since March.
These include a four-day work week, 50 per cent remote work and 50 per cent fuel allowance cuts for government vehicles, as well as two-week school closures.
The Oxford Economics report, released on Monday, said lower imports in Pakistan due to policy curbs and weaker demand were likely to ease immediate pressure on the country’s reserves.
But it warned such measures would also intensify domestic shortages, raise inflation and weigh on growth, increasing risks for the country’s IMF bailout program. - South China Morning Post
Courtesy Dawn
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