ISLAMABAD: A recent study by the Pakistan Institute of Development Economics has warned that Pakistan’s economy remains highly vulnerable to any disruption in the Strait of Hormuz, a critical global energy corridor.
The report, titled “Pakistan’s Exposure to a Strait of Hormuz Shock: Fuel Pricing, Inflation, and External Vulnerability,” highlights that even a minor disruption in global oil supplies could sharply increase fuel prices, accelerate inflation, and place significant strain on the country’s external accounts.
According to the study, nearly 20% of global petroleum supply — around 20 million barrels per day — passes through the Strait of Hormuz, making it a key artery for international energy flows. Any geopolitical or logistical disruption could trigger immediate spikes in oil prices.
For Pakistan, where more than 22% of imports consist of energy products, the economic impact could be substantial. The study noted that global oil shocks influence not only crude prices but also freight charges, exchange rates, taxes and domestic pricing structures, amplifying the burden on consumers.
The research challenged the perception that domestic fuel prices are solely determined by crude oil rates, pointing to a more complex transmission mechanism. During crises, shipping costs and war-risk insurance premiums rise, while currency depreciation further increases import bills, resulting in compounded price pressures.
Using a scenario-based framework, the study projected that a mild shock could push inflation to around 8.8% within six months, while a moderate scenario could raise it above 10.4%. In a severe case, inflation could exceed 12%, driven by strong secondary effects, particularly in transport and food prices.
The report also warned of risks to Pakistan’s external balance, noting that monthly petroleum imports could rise by up to $384 million. In severe scenarios, the current account could shift from surplus to deficit, with the annual external impact exceeding $4.6 billion.
The study identified high-speed diesel (HSD) as a major driver of inflation due to its widespread use in transport, agriculture and supply chains, making it a key channel for second-round price increases.
To mitigate risks, the report recommended adopting a transparent fuel pricing mechanism, improving coordination among institutions including the central bank and finance authorities, and providing targeted support to essential sectors. It also called for long-term reforms to reduce reliance on diesel and strengthen energy resilience.
The study concluded that disruptions in the Strait of Hormuz should be viewed not merely as external shocks but as significant domestic macroeconomic risks requiring coordinated policy responses.