Pakistan Economy and the Oil Crisis: How the Iran War Hits Closest to Home

Pakistan is facing its most severe economic stress in decades. The rupee has lost over 60% of its value against the dollar since 2022. Inflation has averaged above 25% for two consecutive years. Foreign exchange reserves have repeatedly dipped below the minimum safety threshold. And now, with oil above $110, the import bill is crushing what little fiscal space remains.

This article looks at the direct link between the current geopolitical crisis — centred on Iran, Hormuz, and the broader Middle East — and Pakistan's economic situation. Because for Pakistan, these are not abstract global events. They are direct cost increases arriving every month on the energy import bill.

The Hormuz Problem for Pakistan

Pakistan imports the vast majority of its oil and LNG through the Gulf — much of it shipped through or near the Strait of Hormuz. When Iran threatens to close the strait, the threat is not abstract to Islamabad. It means potential supply disruption to the country's power plants, factories, and transport network simultaneously.

Pakistan has almost no strategic petroleum reserve. Where a country like Japan can release reserves to cushion a 2-week supply shock, Pakistan cannot. Any supply disruption translates almost immediately into either blackouts or a currency crisis as the government scrambles to secure emergency supplies at spot prices.

The Inflation Transmission Mechanism

Here is how global geopolitical stress reaches Pakistani consumers:

1. Oil rises globally due to Iran war, Hormuz risk, and supply uncertainty
2. Pakistan's import bill increases — the country spends roughly $15–18 billion per year on energy imports
3. Dollar demand rises as Pakistan needs more dollars to pay for oil, weakening the rupee
4. Petrol prices rise domestically — the government either passes costs to consumers or subsidises at unsustainable fiscal cost
5. Everything gets more expensive — transport, food production, electricity — because Pakistan's supply chains run on oil

The Rupee and the Dollar Connection

There is a second channel that most analyses miss. When global geopolitical stress rises, the US dollar strengthens as a safe-haven currency. This is reflected in our DXY (Dollar Index) component. A stronger dollar means every barrel of oil Pakistan buys costs more rupees — even if the oil price in dollars stayed constant.

In 2022, Pakistan faced this double pressure: oil spiked in dollar terms after Ukraine, and the dollar itself strengthened. The rupee fell from around 180 to 230 per dollar in six months. The combined effect was a near-doubling of the effective cost of energy imports in rupee terms.

The same dynamic is playing out in 2026, with Iran replacing Ukraine as the primary trigger.

What to Watch

The key variable is whether the IMF programme stays on track. Pakistan is currently under an Extended Fund Facility that requires specific fiscal targets. If oil stays above $110, meeting those targets becomes extremely difficult without either raising domestic energy prices further (more inflation) or expanding the deficit (more debt, more currency pressure).

Watch the WTM Finance signal alongside the WTM Energy signal. When both are elevated simultaneously — energy above 85 and finance above 60 — the historical pattern for Pakistan is rapid currency depreciation within 60 days.