Arya News - For now, it seems that Pakistan’s slow slide back into macroeconomic decline has been halted, with the new budget offering a glimmer of hope amid renewed geopolitical stability.
ISLAMABAD – For now, it seems that Pakistan’s slow slide back into macroeconomic decline has been halted, with the new budget offering a glimmer of hope amid renewed geopolitical stability.
That is not to say that the conflict has not wreaked havoc. According to the International Monetary Fund’s (IMF) World Economic Outlook for April 2026, global growth is projected to slow to 3.1 per cent in 2026 and 3.2pc in 2027.
Since then, many more strikes have been exchanged amid a precarious ceasefire, even as the two countries hovered close to an understanding. At home, Finance Minister Muhammad Aurangzeb said last week that the country is heading towards a 4pc growth rate, which had to be revised down to 3.7pc.
So how will peace change the status quo, and what happens if the course is reversed?
Worst-case scenario
“Do you know how to ride a bicycle?” economist Kaiser Bengali asks, wryly.
If the deal breaks down and strikes resume within two months, not only would the Strait of Hormuz be blocked, but the Red Sea route may be as well. Recently, Yemen’s Iran-aligned Houthis threatened to disrupt the route through which Saudi Arabia has since redirected more than 70pc of its daily crude exports — the Red Sea port of Yanbu.
“Even if we are willing to pay Rs1,000 for a litre of petrol, the pumps will be empty, and people will resort to walking or cycling,” says Mr Bengali.
In that case, all relief measures currently in force will be reversed and new taxes imposed to survive a fresh economic crisis. The current budget is walking a tightrope between the IMF’s targets, with tax collection at Rs15tr, primary surplus at 2pc, and fiscal deficit at 3.6pc while offering select relief measures.
The usual buffer of remittances might not keep the current account afloat for long. “Remittances have surged recently, in part because overseas Pakistanis are buying property back home as an insurance policy in case they are forced to leave the Gulf,” says Mr Bengali.
This temporary spike in inflows may continue for another quarter or so, but remittances from regular wage earners could weaken until Gulf economies recover. Mr Bengali points to both physical destruction and damage to confidence caused by the conflict. Some businesses that relocated may not return, while tourism and investment activity could take time to normalise.
Weaker remittances, at a time when budget stimulus could raise the import bill, would widen the current account deficit, putting pressure on the exchange rate. A depreciating rupee makes foreign debt servicing — 43pc of the budget — a lot more challenging.
Another risk lies in the budget’s dependence on provincial cooperation. Ehsan Malik, former chief executive of Unilever Pakistan and chief executive officer of the Pakistan Business Council, says that much of the fiscal space rests on provinces generating the surpluses promised to the IMF.
If those targets are missed, particularly in the event of renewed conflict, the government may be forced into corrective measures.
Missing the targets before the review for the next tranche could trigger a mini-budget, which, if past experience is any indication, will hit the captive taxpayer sector the hardest and have an inflationary effect through a higher petroleum levy.
Best case scenario
Oil and gas prices have been the biggest threat to Pakistan’s economy because of the war. However, on Friday, oil prices fell to their lowest levels since early March, with Brent futures settling at $87 a barrel as traders grew more confident about a possible peace deal.
Over the next three to five months, oil prices and the multiplier effect of elevated costs will continue to reverberate in the economy. After that, however, assuming the peace holds, oil prices may come down significantly.
“The US has been marketing its oil and gas very actively, meeting demand that was otherwise served by the Middle East,” says Mr Malik.
“If the UAE continues to stay outside OPEC, it would also produce more. And the additional quantity that will come into the market will depress prices, which will work in Pakistan’s favour.”
Lower oil prices on the international market mean lower petrol prices at home, less inflationary pressure, and more room for the petroleum levy to be absorbed.
The other potential danger of falling remittances is being mitigated by what seems to be a rapprochement between the UAE and Iran, he adds.
For Mr Bengali, the true best-case scenario extends beyond lower oil prices. A comprehensive US-Iran agreement could eventually lead to sanctions relief, allowing Pakistan to pursue long-stalled energy cooperation with Tehran, including the Iran-Pakistan gas pipeline and expanded bilateral trade.
A silver-lining amid the recent tensions is the possibility of inve]stments and developments in local property. The diaspora is roughly 10 million strong, and with global tensions, Pakistan has become plan B for those abroad, points out Hassan Bakshi, chairman of the Association of Builders and Developers.
With a 10-15 year long policy, guaranteed by legislators and without fear of harassment from the FBR, Pakistan can potentially attract billions of dollars from expats, far more than the Roshan Digital Accounts, especially since the shine is off Dubai now, he says.
But for anyone to invest in Karachi like Dubai, the city has to offer Dubai-like policies and facilities.