As the missiles fly across the Middle East, the most immediate shockwaves are felt in regional capitals, as well as Pakistan’s sprawling markets and boardrooms.
The recent collapse of the U.S.-Iran Ceasefire Memorandum of Understanding, a historic interim agreement known as the Islamabad Memorandum, brokered by Pakistan itself to temporarily end the war and reopen the Strait of Hormuz, has plunged global geopolitics back into a state of unpredictability. For Pakistan, a country already on a perilous path toward economic stabilization, the resumption of hostilities constitutes an immediate domestic economic emergency.
To understand the extent of Pakistan’s vulnerability, one must look at the immediate correlation between the Middle East conflict and the domestic Consumer Price Index (CPI). Data from last quarter paints a bleak picture. In May 2026, at the height of the initial US-Iran escalations, inflation in Pakistan hit a two-year high of 11.7%, largely driven by a staggering 36.8% year-on-year rise in transportation costs, directly linked to the conflict’s impact on global oil markets.
When the brief diplomatic miracle of the June ceasefire occurred, relief was instantaneous, if short-lived. By the end of June 2026, national CPI inflation fell to 11.1% on an annual basis, and on a monthly basis the country actually experienced deflation of 0.3%, signaling that runaway price pressures were finally beginning to subside. However, with the resumption of war, this temporary buffer disappeared. Global crude prices are once again reacting to the threat of supply chain disruptions, climbing as high as $100 as Red Sea risks increase. For Pakistan, this means that the recent slowdown in inflation is certain to reverse, forcing the State Bank of Pakistan to maintain painfully high interest rates, thereby stifling private sector credit and industrial growth, precisely when the country desperately needs economic expansion.
While soaring energy prices deal a major blow, the conditions attached to Pakistan’s IMF program define how far the government can go to protect the public, without risking the country’s financial lifeline in the process. Pakistan is currently operating within the strict parameters of a $7 billion IMF Extended Financing Facility (EFF) programme. In recent reviews completed in May 2026, the IMF disbursed $1.32 billion, bringing current total support to $4.8 billion. In its assessment, the Fund explicitly noted that Pakistan had achieved a hard-won level of economic stability despite the ongoing war in the Middle East, but this praise came with a rigid, non-negotiable mandate. National energy prices must remain fully aligned with global costs.
While the government’s ambitious New Energy Vehicle (NEV) Policy 2025-30 aims to ultimately decouple the economy from imported oil, serious network readiness deficits and delayed deployment of public charging infrastructure mean this transition offers no immediate salvation. Therefore, as the Gulf conflict drives up fuel prices, Pakistan faces a binary choice. On the one hand, the government can pass on rising fuel prices directly to the public. In a country that already suffers from significantly reduced purchasing power, pushing gasoline and electricity prices even higher will instantly accelerate inflation in every sector from food logistics to basic industry, risking social unrest.
On the other hand, if the government absorbs the shock by subsidizing fuel prices at the pump, it will immediately exceed the strict primary surplus target of 1.6% of GDP set by the IMF. Violation of this fundamental condition would undoubtedly derail the entire EFF program, halting future disbursements and sending a disastrous signal to bilateral partners and global bond markets.
The energy inflation nexus is not a burden shared equally in Pakistani society; the burden falls heaviest on those who have the least capacity to absorb it. Low-income households spend a much larger share of their income on transport, cooking fuel and electricity. So when the Gulf conflict drives up crude prices, the resulting rise in transportation costs, food logistics, and utility bills acts as a deeply regressive tax.
In this context, renewable energies are becoming a socio-economic necessity. Pakistan is already experiencing one of the fastest solar transitions in the world. According to Ember, the country’s total electricity demand increased by 21% in just two years, but grid-supplied electricity did not drive this growth at all, with the entire 33 TWh increase in demand between FY23 and FY25 being absorbed by distributed solar generation, which alone increased by 36 TWh over the same period – driven almost entirely by households and businesses responding to a power supply. unreliable and expensive electricity.
Each panel installed effectively constitutes a hedge against the next outbreak of violence in the Gulf, insulating a household or farm from a crude price shock that the government cannot control. Solar power has proven particularly valuable to farmers, who have turned to it out of sheer necessity, avoiding diesel-powered irrigation pumps whose fuel costs move in step with the same volatility in the Middle East that drives national inflation. If Pakistan wants renewable energy to provide true insulation for the entire population, financing the adoption of solar energy by low-income households and smallholder farmers deserves to be a central pillar of the country’s response to the crisis, alongside austerity.
Yet the adoption of solar energy, however rapid, remains a response at the household level; it cannot replace the State’s budgetary balance sheet in the face of this crisis. The immediate reality of this assessment is already revealing itself. In preparation for the next tranche of financing, the IMF imposed strict new conditions, requiring semi-annual adjustments to gas tariffs starting this month, followed by strict annual reviews of electricity tariffs.
At the same time, panic over renewed conflict in the Middle East has forced the state to consider domestic austerity measures, including emergency fuel savings and reductions in non-essential development spending to protect the balance of payments. However, for these strategies to be truly effective, austerity must evolve into a national culture of conservation and better consumption habits. Otherwise, although these severe domestic cuts could artificially squeeze demand and satisfy international lenders in the short term, they risk plunging an already fragile economy into a deeper recession.
It is precisely to win this critical moment that Pakistan’s economic diplomacy has relied on its traditional allies. Recent high-level meetings in Riyadh resulted in Saudi Arabia pledging an additional $3 billion in financial support and extending an existing $5 billion deposit to help shore up Pakistan’s foreign exchange reserves, while also supporting the energy sector through oil deferred payment facilities.
The failure of the ceasefire reminds us that diplomatic goodwill does not match geoeconomic reality. Yet Pakistan is not without agency. As the conflict persists, policymakers face a clarifying task of candidly managing the near-term burden of imported inflation, while accelerating the structural reforms already within their reach: an expanded tax base and sustained investment in domestic clean energy. The country’s solar boom is proof that it can adapt with remarkable speed when circumstances require it. All that remains is to translate this instinct into deliberate policy, so that the economic destiny of the nation is no longer written in the Strait of Hormuz.
Arfa Ijaz is an environmental engineer and energy researcher working at the Sustainable Development Policy Institute (SDPI), Islamabad.
Sarim Zia is a researcher at SDPI, working on energy, climate and economic policy issues.
Originally published in The News
