GDP growth is projected to reach 3.6 percent in FY26, reflecting strong activity through February. However, growth in FY27 is revised down due to higher commodity prices and weak external demand resulting from the Middle East conflict. Amid higher commodity prices, CPI inflation is expected to exceed 10 percent in Q4, and to reach 8.4 percent in FY27, before returning to the SBP target range in FY28 — IMF Country Report No. 26/101, May 2026

Although continued tensions in the Middle East, in the aftermath of an unprovoked war imposed on Iran by the United States and Israel have not directly created Pakistan’s economic vulnerabilities, they have definitely brought them under limelight.

The latest data show a country whose inflation, trade deficit, energy security, remittance stability, fiscal space and industrial prospects—are all tied to external shocks over which it has little or no control.

Weekly Sensitive Price Index inflation increased by 0.47 percent week-on-week and 14.52 percent year-on-year as on May 14. This short-term inflation index that tracks the prices of 51 essential kitchen and non-food items across 17 urban centres has registered a broad-based increase, underscoring sustained pressure on the cost of living. The rise was driven largely by steep increases in key items, including petrol (64.23 percent), diesel (61.61 percent), electricity charges (52.58 percent), wheat flour (57.56 percent) and LPG (48.34 percent).This is not ordinary inflation. It is war-impact inflation transmitted through fuel, power, transport and food chains.

The external account is under stress. Pakistan’s trade deficit reached $31.988 billion in the first ten months of fiscal year (FY) 2026, while April imports rose to $6.553 billion, the highest in 46 months. The April petroleum bill alone stood at $2.144 billion, including crude oil, motor gasoline, diesel, liquefied natural gas (LNG) and liquefied petroleum gas (LPG). This shows that Pakistan’s deficit is not the price of industrial expansion; it is the cost of energy dependence, consumption-led imports and policy failure.

The oil shock is the central transmission channel. Pakistan imports $18-20 billion worth of petroleum products annually. A $5 increase in global crude prices can add about $1 billion to the import bill. A $10 per barrel rise can add nearly a percentage point to inflation. This directly weakens the rupee, raises the import bill, forces monetary tightening, deepens circular debt and crowds out development spending.

LNG has become another symbol of crisis management replacing policy. Pakistan LNG Limited rejected costly spot LNG bids that could have imposed an additional $22 million for one cargo. The lower-cost Qatari arrangements may save $22-50 million on two cargoes. Many news reports show that the absence of a durable ceasefire, lasting peace and import constraints have forced the government to prioritise critical sectors, including diversion of gas to urea units to avoid a fertiliser crisis.

The remittance cushion is also fragile. Pakistan received $33.86 billion in remittances during the first ten months of the ongoing FY2026, but more than $18 billion came from Saudi Arabia, the United Arab Emiratesand other Gulf Cooperation Council countries.

Saudi Arabia alone contributed $7.93 billion and the UAE $7 billion. This is no longer a clear strength; there is concentration risk. A prolonged Gulf disruption can hit migrant employment, remittance flows and the external account at the same time.

The war has shown that Pakistan’s economic model is not sovereign. It is externally financed, externally fuelled and externally vulnerable. The remedy is not cosmetic relief, more petroleum levy raises or another IMF-compliant anti-growth budget.

The war has also shrunk growth expectations. It is predicted in the IMF Country Report (No 26/101) that the earlier 4 percent growth path for this year and 5 percent expectation for next year have been derailed, with possible growth loss of 0.2 percent in FY26 and 0.6 percent in FY27 due to higher inflation, interest-rate pressure and currency depreciation.

The weekly energy import bill rose from $300 million to $800 million at the war’s peak. Additional imports and a remittance dip can push the current account into an $8-10 billion deficit.

The strategic lesson is unmistakable. Pakistan cannot remain an economy that imports oil, borrows dollars, taxes the captive, subsidises inefficiency, neglects exports and describes every shock as “external.”

Refinery upgrade, again before the Economic Coordination Committee (ECC) through proposed sales tax relief, has been delayed despite policies issued in 2023. The Petroleum Minister has rightly called refineries critical national assets for uninterrupted fuel supply and energy security, especially after the US-Iran conflict exposed external supply-chain risks.

China Pakistan Economic Corridor (Phase II) must also be seen through this lens. Corridors alone do not create resilience. Pakistan has to move from transit geography to production geography through functioning Special Economic Zones, export-oriented clusters, agriculture modernisation and regional value-chain integration. The problem is not lack of opportunity but weak execution, policy unpredictability, poor contract enforcement and regulatory inconsistency.

The IMF needs to be told that its opposition of new SEZs is unreasonable. Such a policy design is simply unacceptable. Pakistan’s diplomatic efforts to bring about Middle East peace must be appreciated and rewarded by helping it overcome investment barricades.

CPEC’s first phase did remove some hard infrastructure gaps. Major road projects such as the Havelian-Thakot section, Multan-Sukkur motorway and Gwadar Eastbay Expressway stand completed.

The Planning Ministry has also claimed that CPEC’s first phase created around 200,000 direct jobs. Yet the 2017 CPEC vision was not limited to asphalt, electricity and port walls. It was about equitable growth: service stations, warehousing, cold chains, tourism, transit trade, small enterprises, border markets, youth employment and regional peace. That is where Pakistan failed.

Gwadar remains the clearest symbol. A $240 million China-financed international airport stands completed, but the city still lacks reliable electricity and clean water and the local people are still protestong for basic necessities. A corridor that bypasses the people cannot become a development model.

Budget 2027 must therefore transform CPEC from a contractor-led infrastructure programme to a people-centred economic corridor. The allocations should include: completing Main Line-1 and Karakoram Highway realignment;

financing Gwadar’s water, electricity, health, education and technical training on priority;

establishing service areas every 50-70 kilometers on CPEC routes; creating cold chains, agro-logistics and export processing clusters; funding border markets at Khunjerab, Torkham, Taftan and Gwadar; and

allocating a dedicated CPEC Local Enterprise Fund for youth, women, transporters, mechanics, food outlets, tourism operators and small manufacturers.

SEZs must be linked with agriculture, minerals, fisheries, textiles, engineering and information technology, not left as real estate schemes. Gwadar must receive a legally protected local employment quota, fisheries protection, desalination, vocational institutes and municipal services before more ceremonial projects are announced.

The test of Budget 2027 is simple: CPEC Phase II must be accelerated to create livelihoods, exports and regional trade.

The conclusion is harsh but unavoidable: the war has shown that Pakistan’s economic model is not sovereign. It is externally financed, externally fuelled and externally vulnerable. The remedy is not cosmetic relief, more petroleum levy raises or another IMF-compliant and anti-growth budget.

Pakistan needs technology-based foreign direct investment to ensure export-led growth, strategic oil reserves, cheap and renewable energy sources, refinery modernisation, aggressive public transport electrification, export competitiveness, diversified remittance markets, regional energy options, lower-rate taxation, documentation of untaxed elites and a shift from import consumption to productive capacity. Otherwise, every war in the Gulf, every blockade of Hormuz and every oil-price spike will become a tax imposed on Pakistan’s poor.

The writers are lawyers, adjunct faculty at Lahore University of Management Sciences and members of the Advisory Board of Pakistan Institute of Development Economics.