FOR import-dependent Pakistan, already grappling with its worst cnsis in recent history, another conflict in the neighbourhood is deeply alarming.

Outside the Middle East, Pakistan may be among the countries hardest hit by the ongoing Iran-Israel war, facing significant economic and social repercussions.

Any widening of the conflict would multiply Pakistan`s economic and diplomatic challenges many times over.

An indirect reassurance, late last week, from President Donald Trump, promising not to directly target Iran for the next two weeks, has sparked hopes that a ceasefire and a peace deal, possibly brokered by concerned partners, may still be within reach.

The timing of the war, breaking out just as Pakistan was finalising its budget, has compounded challenges. It diverted focus from pressing domestic issues and disrupted key assumptions underlying the budget proposals, rendering several key projections unrealistic.

On query if the government is considering redrafting the budget, Khurram Schehzad, a member of Prime Minister Shehbaz`s economic team was categorical, `although temporary disruptions may affect localised informal trade, inflation and investor confidence remain stable, and budget planning is anchored in prudence, with built-in buffers to absorb external shocks. Flexibility will be maintained, but there is no immediate need to revise projections unless global conditions deteriorate significantly.` The conflict is likely to drive up oil prices and shipping costs, factors that budget makers had assumed would remain stable or decline. The extent of the impact will depend on how prices move, but analysts agree that a prolonged conflict would almost certainlylead to significant increases.

This would derail inflation targets, revive fiscal and current account pressures, strain foreign exchange reserves and weaken the rupee. It could also force the government to revisit or roll back revenue measures such as higher petroleum development levy and the proposed carbon tax.

Higher import costs and expensive oil will raise the government`s subsidy burden and push up commodity prices for consumers, not only due to pricier imported goods but also because local products often rely heavily on imported inputs. In this scenario, inflation, which has fallen from historic highs of 38 per cent in May 2023 to just 3.5pc by May 2025, is likely to surge again.

This will also disrupt the downward trend in interest rates that have gradually been lowered from 22pc in June 2023 to 11pc by May 2025 by the State Bank of Pakistan (SBP), but market expectations for further reductions were dashed when, following the IranIsrael conflict, the SBP opted to steady rates in its monetary policy announcement last Monday.

The investment rate is unlikely to pick up, further undermining GDP growth projections that were already considered ambitious even before the war. As private investors grow more cautious and the government`s capacity to invest is constrained by likely cuts to the development budget to meet the IMF`s stabilisation conditions, any meaningful increase in growth seems improbable.

Rising risk perceptions, global uncertainty, high borrowing costs and fears of additional direct taxes to offset the reversal of indirect revenue measures will further dampen investor confidence, already fragile to begin with.

Commenting on the situation, Dr Manzoor Ahmed, a trade expert andformer Pakistan World Trade Organisation representative, said: `The immediate impact is a sharp rise in global oil prices, up nearly 7pc since hostilities began. For Pakistan, where imported energy accounts for 30pc of total imports, this is deeply concerning. Past crises, such as the 2008 Iraq war and 2022 Russia-Ukraine conflict, saw oil prices soar above $120 to $145 per barrel, triggering severe inflation, balance of payment crises and political upheaval, even toppling governments.` He added, `If Iran closes the Strait of Hormuz, which handles a fifth of global oil trade, it would disrupt supply chains, spike freight and insurance costs, risk pushing major economies into recession. Such shocks would hit Pakistan`s exports and derail any fragile progress towards economic stability and growth.` Mr Schehzad responded to queries by saying, `While regional tensions warrant close monitoring, it`s important not to overstate their immediate economic impact on Pakistan.` He explained that the government is actively tracking developments and devising a strategy via a dedicated team and the situation remains manageable for now.

Younus Dagha, former federal secretary and Sindh minister and current Chairman of the Policy Research Advisory Council (PRAC), noted: `Wars and natural disasters can`t be fully accounted for during budget planning; provisions are made as events unfold. It`s impossible to predict whether the Iran-Israel conflict will end quickly or drag on for months. While PRAC has already questioned the growth and revenue targets in the 2025-26 budget, it remains too early to gauge how this crisis on our western border will affect the economy.

Sharing a detailed note responding to queries, Ehsan Malik, CEO of the Pakistan Business Council, articulated the opinion of the business elite. `Middle East tensions are pushing up fuel costs and threatening supply through the Strait of Hormuz, which carries 15pc of global oil and 20pc of gas.

The region supplies half the world`s energy.

Brent crude has climbed to a five-month high at $77.2 per barrel.

`For Pakistan, which spends about $20 billion on oil and gas [a third of imports], a 7-10pc price hike could strain the external account by $1.5-2bn and weaken the rupee, especially against the euro. Higher fuel costs will fuel inflation, but fiscal space is too tight to lower the Petroleum Development Levy. There`s no need to delay the budget; any adjustments can be made through mini-budgets if needed,` his note stated in essence.

An additional dimension with far-reaching implications for Pakistan`s politics and economy is the impact on the restive and underdeveloped province of Balochistan, which hosts some of the country`s largest China-Pakistan Economic Corridor infrastructure projects and rich mineral deposits, including the gold and copper reserves at Reko Diq.

The ongoing conflict risks further destabilising the region, whose economy, lackingsignificant industry or agriculture, depends heavily on cross-border informal trade for livelihood. In response to security concerns, Pakistan has already tightened controls on the Afghanistan border and, following the Israel attack, sealed the key entry and exit points along its 560 miles border with Iran.

Balochistan shares a 724-miles border with Afghanistan. The halt in informal trade with Iran has been felt nationwide, as Iran is a relatively affordable source for products like toiletries, cigarettes, confectionaries, chocolates, snacks, powdered milk, woollens, plastic goods and petroleum products.

Majyd Aziz, former president of the Karachi Chamber of Commerce and Industry remarked, `Lessons must be learned from Yemen`s recent Suez Canal blockade Pakistan typically holds only three weeks of oil reserves. Another risk is a potential influx of Iranian refugees into Balochistan, echoing the lasting challenges Pakistan faced with millions of Afghan refugees. Furthermore, disruptions in sea routes could hamper exports, triggering factory closures if shipping lines reroute vessels.

`Challenging days lie ahead for the country and its people, so the government must proactively develop contingency plans rather than rely on ad hoc or stopgap measures to tackle the looming crises,` he ended.m