Islamabad : Prof Ahmad Fraz from Pakistan Institute of Development Economics (PIDE) in a study has said that the Iran-Israel conflict is not a distant geopolitical development for Pakistan as It is already being reflected in the country’s economy through oil markets, inflation expectations and movements in the Pakistan Stock Exchange.
The study “From the Strait of Hormuz to the PSX: what the Iran-Israel war reveals about Pakistan’s economic vulnerability” issued here by PIDE argues that Pakistan’s exposure extends beyond rising oil prices and is rooted in structural vulnerabilities. As an oil-importing economy closely linked to Gulf energy routes, Pakistan remains highly sensitive to disruptions in the Strait of Hormuz, where even limited instability can quickly translate into higher costs, external pressures and financial uncertainty.
The study draws on recent market developments to substantiate its argument. The Pakistan Stock Exchange did not experience a uniform decline, nor did it remain stable. Instead, it underwent correction, heightened volatility and an uneven recovery. This pattern suggests that investors interpreted the conflict not as a temporary disturbance, but as a broader macro-financial shock with implications for inflation, business costs, investor confidence and overall economic stability. Sectoral responses were also differentiated as while oil and gas-related segments demonstrated some resilience, the banking sector remained under sustained pressure, reflecting underlying domestic vulnerabilities.
According to the viewpoint, the stock market functioned as an early indicator of emerging economic stress. Financial markets adjusted rapidly as they incorporate expectations about future risks rather than current conditions. As concerns related to oil supply, inflation, exchange-rate pressures and financing conditions intensified, market valuations responded ahead of their reflection in official economic indicators. The transmission of the shock occurred through multiple interconnected channels, including supply disruptions, increased freight and insurance costs, imported inflation, rising operational expenses and a broader repricing of financial risk.
A key finding of the study is the divergence across sectors. Banking stocks emerged as a clear indicator of domestic stress, reflecting concerns related to inflation, credit quality and tightening financial conditions. While the oil and gas sector exhibited relative resilience, it did not provide complete insulation, as broader country risk and structural constraints continued to influence performance.
The analysis further emphasises that the risks extend beyond market volatility.
