The Pulse | Economy | South Asia

Pakistan’s Economic Stabilization Efforts Face Their Biggest Challenge With Iran War

Economic stabilization achieved over the past fiscal year, when inflation finally began to decline, could prove painfully short-lived if the crisis does not end soon.

Expatriate workers at a construction site in Dubai, UAE.

Just when it seemed that Pakistan’s economy was beginning to look up after battling one of the worst economic crises in its history over the past three years, the war in West Asia has hit it hard, putting in peril many of the hard-won gains it made over the past year.

In 2023, the country stood on the brink of bankruptcy as its foreign reserves depleted to alarmingly low levels and skyrocketing inflation eroded the purchasing power of ordinary households, making it impossible for the country to manage its finances.

Pakistan gradually restored a measure of calm through a mix of tough fiscal measures and external support from multilateral lenders and a steady flow of remittances. The country’s current account, which has long been a source of worry, moved into surplus for the first time in 14 years in 2025. Moreover, inflation eased noticeably, which in the past year has given families and businesses some breathing room, and the Pakistani currency found a degree of stability over the past year.

It can be argued that for the first time in years, Pakistan’s policymakers had begun to look beyond day-to-day crisis management to focus on nurturing sustainable growth. In recent months, the Pakistani government had started to explore ways to offer incentives to exporters by easing investment rules and encouraging private-sector lending.

However, that hard-won economic stability is now facing its most serious external test.

The war in West Asia, which has now entered its second month with no ceasefire or resolution in sight, has sent shockwaves across global energy markets and regional supply lines.

Pakistan’s growth ambitions, such as efforts to increase exports, that seemed within reach a few weeks ago, are likely to be delayed. More worryingly, the very foundations of macroeconomic calm, which the country has achieved, could come under fresh strain.

Analysts have already warned that if oil prices climb toward or beyond $100 a barrel, Pakistan’s current-account position could deteriorate sharply. The country relies heavily on imported oil and refined products, which essentially means that any sustained spike in global benchmarks can inflate the import bill substantially. It is possible that the modest current account surpluses that the country recorded in the first half of the current fiscal year could be wiped out entirely if oil prices remain elevated. Arguably, the longer the war drags on, the greater the risk that external pressures can undo the careful gains of recent years. For an economy like Pakistan, which is still operating with relatively thin buffers, such a reversal could prove particularly punishing for the masses, and could become a source of instability.

The war in West Asia is also threatening the country’s most important income stream linked to overseas employment and workers’ remittances. Every year, hundreds of thousands of Pakistanis travel to the Gulf region for jobs. This migration of workers not only eases pressure on the domestic labor market but also generates income that supports millions of families in Pakistan. While these remittances sustain thousands of households, they also act as a vital financial cushion for the country, as they help finance imports and bolster foreign-exchange reserves.

Recent reports suggest that the ongoing crisis in West Asia........

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