ISLAMABAD: A comprehensive new analysis by the Pakistan Institute of Development Economics (PIDE), operating under the Planning Commission, has sounded a stark warning about the fragility of Pakistan’s economy in the face of any disturbance in the Strait of Hormuz. This strategic maritime chokepoint, through which a significant portion of the world’s oil supply transits, plays a pivotal role in shaping global energy markets. The study underscores that even a minor disruption in this crucial passage could trigger a cascade of economic challenges for Pakistan, including soaring fuel prices, escalating inflation, and mounting pressure on the country’s external financial position.
The research, titled “Pakistan’s Exposure to a Strait of Hormuz Shock: Fuel Pricing, Inflation, and External Vulnerability,” was authored by economists Ahsanul Haq Satti and Shahzada M Naeem Nawaz. It offers a detailed scenario-based evaluation of how shocks originating from global energy supply interruptions ripple through Pakistan’s economy. The Strait of Hormuz is responsible for the transit of nearly 20 million barrels of petroleum daily, accounting for roughly 20% of the global oil supply. Any geopolitical tension or logistical blockade in this narrow waterway can cause immediate and sharp increases in oil prices worldwide.
For Pakistan, an economy heavily reliant on energy imports—where energy products constitute over 22% of total imports—the stakes are particularly high. The study highlights that the impact of oil price shocks extends far beyond crude oil costs alone. It intricately affects freight and shipping charges, exchange rate fluctuations, taxation policies, and domestic fuel pricing mechanisms. These interconnected factors collectively amplify the burden on consumers, making the inflationary impact far more severe than commonly perceived.
Challenging the widespread assumption that domestic fuel prices are driven solely by crude oil rates, the study reveals a more complex transmission mechanism. During periods of crisis, freight costs and war-risk insurance premiums tend to surge, while depreciation of the Pakistani rupee further inflates import expenses. Additionally, taxes and profit margins imposed along the supply chain compound the final retail prices of fuel. This multifaceted process results in layered domestic price shocks that significantly exacerbate inflationary pressures across the economy.
Utilizing a nonlinear scenario framework, the study models three potential outcomes of a Strait of Hormuz disruption: mild, stress, and severe shocks. The findings are alarming. In a mild shock scenario, inflation could climb to nearly 8.8% within six months. Under a stress scenario, inflation might surpass 10.4%, reaching levels considered macroeconomically critical. The most severe shock could push inflation beyond 12%, driven by strong second-round effects, particularly through diesel-dependent transport and food supply chains. Even under conservative assumptions, any existing trends toward disinflation could be swiftly reversed, with diesel prices playing a central role in amplifying the economic shock.
Moreover, the study draws attention to the potential destabilization of Pakistan’s external accounts. Monthly petroleum import bills could surge by as much as US$384 million, rapidly turning a current account surplus into a deficit within a short span. In severe scenarios, the annual external financial impact could exceed US$4.6 billion. This creates a dangerous feedback loop where increased import costs weaken the rupee, which in turn drives fuel prices higher, further fueling inflationary pressures.
A particularly critical insight from the research is the outsized influence of high-speed diesel (HSD) in transmitting inflationary shocks. Diesel is deeply embedded in Pakistan’s transportation, logistics, agricultural production, and food supply chains. As a result, fluctuations in diesel prices have a pronounced effect on second-round inflation, especially in food prices, which directly impacts the cost of living for ordinary citizens.
In light of these findings, the study calls for immediate and coordinated policy interventions to mitigate the risks posed by potential disruptions in the Strait of Hormuz. Recommended measures include implementing a transparent, rules-based fuel pricing mechanism to reduce market uncertainty, prioritizing the monitoring of diesel prices, and enhancing coordination among key institutions such as the State Bank of Pakistan, Ministry of Finance, and Petroleum Division. Additionally, targeted support for essential supply chains and public transportation is advised, alongside proactive planning for fuel financing to safeguard the external account.
Looking further ahead, the study emphasizes the necessity of structural reforms aimed at reducing Pakistan’s heavy dependence on diesel and improving overall energy resilience. The message from PIDE is unequivocal: Pakistan’s vulnerability to global energy shocks is far more intricate and severe than commonly understood. A disruption in the Strait of Hormuz should not be viewed merely as an external event but as a looming domestic macroeconomic crisis that demands urgent attention. Managing fuel pricing, inflation, and external stability in a coordinated manner will be essential to shield the economy from future shocks.
