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Rising Fuel Prices in Pakistan: The Middle East Conflict’s Cascading Economic Toll

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On the morning of March 6, 2026, Sohail Ahmed pulled his motorcycle into a petrol station in Karachi and watched the meter tick past 3,200 rupees. A week earlier, the same fill-up had cost him 2,662. Ahmed is 27, a delivery rider who supports a family of seven, and he had little patience for the government’s freshly announced austerity package — the four-day workweeks for civil servants, the school closures. “For me, the main concern is the fuel price because that increases the cost of every little thing,” he told Al Jazeera. He was right. And then some. Al Jazeera

The Geography of Vulnerability

Pakistan has always been exposed to what happens in the Gulf — structurally, financially, and politically. Over 80% of the country’s oil and refined fuel needs are met through imports, and roughly 80% of its crude oil imports typically pass through the Strait of Hormuz before reaching Karachi’s port. When the United States and Israel launched military operations against Iran on February 28, 2026, igniting the most severe Middle East conflict in decades, that vulnerability ceased to be a theoretical risk. OilPrice.com

Iran’s subsequent closure of the Strait of Hormuz triggered what the International Energy Agency described as the greatest global energy security challenge the oil market has ever confronted. About 25 to 30% of global oil and 20% of liquefied natural gas passes through the chokepoint, feeding demand across Asia and parts of Europe. For Pakistan, the consequences arrived almost immediately. International Monetary Fund

Prime Minister Shehbaz Sharif said Pakistan’s oil import bill had surged from $300 million before the conflict to $800 million, erasing all the economic progress the country had made over the past two years. Pakistan was not walking into this from a position of strength. The country holds only 10–14 days of petroleum reserves — significantly less than regional peers like India, which maintains roughly 65–70 days of stock. The margin for error was already razor-thin. Al JazeeraOilPrice.com

Rising Fuel Prices in Pakistan: A Record No One Wanted to Set

Pakistan has recorded the world’s second-highest surge in domestic fuel prices since the start of the Iran war, with petrol and diesel soaring 56% — second only to Myanmar’s 90% increase, and far exceeding hikes in the United States, Britain, and several regional countries. Arab News

The numbers are striking. Before the conflict, petrol sold for Rs 266.17 per litre and diesel for Rs 280.86. By April 4, 2026, both had reached an all-time high of Rs 520.35 per litre. A modest government cut in mid-May brought petrol to Rs 409.78 and diesel to Rs 409.58 — still 56% above pre-war levels. Under normal conditions, the Oil and Gas Regulatory Authority reviews prices fortnightly. Since March 2026, OGRA has been operating on weekly review cycles, a concession to extraordinary market volatility.

The arithmetic of Pakistan’s energy exposure is unsparing. A study by the Pakistan Institute of Development Economics (PIDE) found that every $10 increase in global oil prices raises Pakistan’s annual petroleum import bill by approximately $1.8–$2.0 billion. PIDE has warned that a closure of the Strait of Hormuz could trigger an oil price rally of up to $150 per barrel, causing Pakistan’s monthly fuel import bills to skyrocket to between $3.5 billion and $4.5 billion. OilPrice.com

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Between July 2025 and February 2026, Pakistan’s oil imports totalled $10.71 billion. The trajectory of subsequent months suggests the full fiscal-year figure will be dramatically higher. OilPrice.com

The IMF, which is administering a $7.2 billion Extended Fund Facility for Pakistan, has made clear that Islamabad’s room for manoeuvre is tightly circumscribed. In April, when Prime Minister Sharif sought IMF approval for higher fuel subsidies, he was rebuffed. A temporary concession — an Rs 80 per litre reduction in petroleum levies on petrol — eventually expired, restored to protect a more than $1 billion loan tranche. The government’s own minister acknowledged it was not raising petroleum prices willingly, but was compelled to do so because of obligations under the IMF programme. Aaj English TV

Pakistan also launched Operation Muhafiz-ul-Bahr — “Protector of the Seas” — a Pakistan Navy maritime security mission in March 2026, aimed at ensuring uninterrupted trade through critical Sea Lines of Communication. It is an assertion of sovereign intent. It cannot, however, move crude oil markets.

Why Pakistan’s Economy Is Disproportionately Exposed to the Middle East Oil Shock

The picture is more complicated than simple price pass-through.

How does the Middle East conflict affect fuel prices in Pakistan? The conflict disrupted the Strait of Hormuz, through which 80% of Pakistan’s crude imports transit. Iran’s closure of this chokepoint cut global supply and pushed Brent crude above $100 per barrel. Pakistan imports over 80% of its fuel needs, so price spikes transmit directly to domestic pumps. Combined with a weakening rupee and a petroleum reserve buffer of just 10–14 days, the shock reached Pakistani consumers faster — and more severely — than in almost any other major importing economy.

Pakistan’s structural vulnerability reflects policy failures that compounded over decades, not a single administration’s mistakes. Its strategic reserve cover — 10 to 14 days — leaves virtually no buffer when supply chains rupture. The IEA recommends 90 days as a minimum. The gap between recommendation and reality is not a rounding error; it is a national risk.

Then there is the currency dimension. Oil is priced in US dollars. A weakening rupee magnifies every global price movement even when crude prices hold steady. Both pressures converged in March 2026: global crude spiked and the rupee came under renewed depreciation pressure as Pakistan’s current account deficit widened.

The IMF’s April 2026 World Economic Outlook offered the clearest quantitative framework: for the average MENAP emerging-market oil importer, a 10% increase in crude oil prices reduces output by approximately 0.5 percentage point and adds roughly 1 percentage point to inflation. Pakistan has not experienced a 10% increase. It has experienced a sustained environment of triple-digit crude prices, implying GDP compression and inflation consequences that would, in any other moment, constitute a national emergency. International Monetary Fund

The State Bank of Pakistan confirmed as much. It raised its key policy rate by a full percentage point to 11.5%, noting that the prolonging of the Middle East conflict had intensified risks to the macroeconomic outlook. Inflation surged to 10.9% in April from 7.3% in March. Pakistan’s weekly Sensitive Price Indicator — the economy’s most granular near-term barometer — rose 14.52% year-on-year in the week ending May 14, with Topline Securities projecting a May CPI reading of between 11% and 11.5%, which would mark the highest monthly inflation in 23 months. Al JazeeraPakistan Today

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The Gulf dependency also runs deeper than energy. Approximately nine million Pakistanis work in Gulf Cooperation Council countries. A slowdown in Gulf construction, tighter regional financial conditions, or delayed hiring due to the ongoing war can hit Pakistan through workers’ income as well as capital flows. Remittances are a critical pillar of Pakistan’s balance of payments. It’s a second-order consequence that most inflation models do not fully capture. New Kerala

Second-Order Fallout: Agriculture, Food Security, and Political Risk

The most immediate transmission channel is transport. Within hours of the Rs 55 per litre fuel hike on March 6, freight charges from Pakistan’s major wholesale hubs had reacted. Transport costs from major wholesale hubs such as Karachi, Faisalabad, and Sargodha nearly doubled following the fuel price hike, triggering significant price increases for essential food items across Punjab province. Mutton climbed to PKR 2,700 per kg. Milk sold at PKR 230. Gram pulse reached PKR 390. These are not abstract indices — they are the daily mathematics of 230 million people, tens of millions of whom already spent over 40% of household income on food before the crisis arrived. New Kerala

Agriculture is where the second-order shock becomes structurally dangerous. High-Speed Diesel powers tractors, tube wells, harvesters, and water pumps across Pakistan’s agricultural sector, and changes in diesel prices directly influence food production costs and agricultural operations. With the wheat harvest arriving in April and May, higher diesel costs translated into higher production costs for Pakistan’s most essential staple. Farmers either absorb these costs — reducing income and, eventually, cultivated acreage — or pass them along as higher flour prices. Profit by Pakistan Today

The disruption of fertiliser shipments — with about one-third of global fertiliser passing through the Strait of Hormuz — compounds the agricultural threat, raising concerns about yields and harvests through the year. Pakistan’s food security situation, already strained by severe flooding in preceding seasons, now faces a compounded supply-side shock. International Monetary Fund

The political dimensions are harder to quantify but impossible to ignore. Rickshaw drivers protested in Lahore on April 7. Pakistan’s Senate has witnessed sharp opposition attacks on the government’s management of the crisis. Economist Kaiser Bengali, former planning and development adviser to the Sindh government, said: “We are in a state of absolute dependency, where even a $1 billion tranche, which is a microscopic amount in global fiscal terms, can make the difference between survival and collapse.” Al Jazeera

PIDE has warned that the impact of rising fuel prices could potentially push inflation from 7% to 17% in a worst-case scenario, a level that would torch the purchasing power of Pakistan’s lower-middle-income households and set off a political crisis that fiscal statistics alone do not convey. OilPrice.com

The Case for Cautious Optimism — and Its Limits

Not every analyst believes the situation is unmanageable.

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Energy analyst Amer Zafar Durrani, a former World Bank official and chief executive of advisory firm Reenergia, said the government’s austerity measures could work in the short term. Pakistan has also demonstrated some flexibility in supply diversification: talks on alternative LNG sourcing have moved beyond Qatar, and the long-delayed Iran-Pakistan gas pipeline has been quietly revisited in diplomatic channels. Al Jazeera

The April 7 ceasefire — and a subsequent two-week extension — did provide genuine relief. Brent crude retreated from triple-digit levels. Pakistan was able to cut petrol and diesel prices by Rs 5 per litre on May 16. The weekly OGRA review cycle, itself a marker of how abnormal the preceding months had been, appeared ready to normalise.

Energy expert Muhammad Saad Ali, head of research at Lucky Investments Limited, noted that Pakistan still has alternative options to manage gas supply disruptions, and that the situation is “not a shortage like it was after the Ukrainian war.” Arab News

Yet the structural argument is harder to set aside. Pakistan’s 10–14-day reserve cover has not changed. Its 80% import dependency on petroleum has not changed. Its susceptibility to exchange rate pressure has not changed. The IMF’s own modelling warns that for countries with preexisting fuel subsidies and links to the Middle East through remittances, the current conflict delivers additional pressure on both household incomes and external balances. IMF programme constraints limit the government’s ability to cushion consumers, even if policymakers wanted to. International Monetary Fund

Operation Muhafiz-ul-Bahr reflects genuine strategic ambition. A naval security mission cannot, however, alter Brent crude futures.

The real question — whether this crisis accelerates overdue structural reforms in Pakistan’s energy sector, or whether it is simply endured until global oil markets stabilise — remains uncomfortably open.

A Reckoning Long in the Making

Pakistan’s predicament is, in one sense, the story of every energy-importing developing economy in 2026: a country caught between geopolitical forces entirely beyond its control and domestic vulnerabilities that were very much within its power to address — and, for the most part, weren’t. The Strait of Hormuz did not create Pakistan’s 10-day reserve buffer or its 80% import dependency. It exposed them.

The IMF has noted that for fuel-importing economies, the effect of the Strait’s de facto closure is that of a large, sudden tax on income. For a country already under strict multilateral conditionality — with a fiscal position that cannot absorb broad subsidies and a political landscape that cannot easily absorb the social costs of austerity — that is not merely an economic metaphor. It describes the precise shape of the bind. International Monetary Fund

Sohail Ahmed is unlikely to track the IMF’s MENAP Regional Economic Outlook. He will, however, notice if his costs fall further. The Rs 5 per litre cut on May 16 reduced his tank refill by roughly 160 rupees — a gesture against a 56% cumulative surge.

What Pakistan’s economy requires is not a gesture. It’s a strategy that outlasts the conflict.


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Analysis

Malaysia Bets Its 2026 on “Execution” — And the Semiconductor Upcycle Is Doing the Heavy Lifting

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Malaysia’s government has declared 2026 a year of “execution” and “discipline” as the Anwar Ibrahim administration races to deliver on the 13th Malaysia Plan (RMK13) ahead of elections that could come as early as February 2028, according to Fortune’s interview with economy minister Akmal Nasrullah Mohd Nasir.

A Strong Base to Build From

Malaysia’s economy grew 4.9% in 2025 following 5.1% growth the year before, with unemployment falling to 2.9% — the lowest in a decade — and the ringgit trading at its strongest level in five years. HSBC’s ASEAN economist Yun Liu forecasts 4.6% growth for 2026, citing strength in electrical equipment manufacturing, tourism, and sound government policy, while Nomura economists have projected an even more bullish 5.2%, pointing to infrastructure spending under RMK13.

The ASEAN+3 Macroeconomic Research Office (AMRO) projects growth moderating slightly to 4.6% from an estimated 4.9% in 2025, describing Malaysia’s performance as reflecting its “entrenched position in global semiconductor and electronics value chains” and the broader global tech upcycle, according to AMRO’s assessment of Malaysia’s investment upcycle.

Navigating Washington Without Picking Sides

Malaysia’s trade relationship with the US has been turbulent. Washington imposed 25% tariffs on Malaysian goods in April 2025, rattling the country’s export-led economy, before a deal reduced US duties to 19% in exchange for Malaysia lowering tariffs on select American products, with exemptions carved out for aviation components and electrical equipment. Malaysia’s trade hit a record high of more than 3 trillion ringgit (roughly $780 billion) last year despite the friction.

Deputy finance minister Liew Chin Tong has framed Malaysia’s positioning explicitly around neutrality: the country is “not China, not the US,” a stance he argues gives Malaysia a strategic advantage in both geopolitical and supply-chain terms, according to Fortune’s reporting from the Forum Ekonomi Malaysia summit.

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Capital Is Flowing In — From Everywhere

Malaysia recorded 22.8 billion ringgit (about $5.8 billion) in foreign direct investment in the first quarter of 2026, a 6.0% year-on-year increase, moderating from the prior quarter’s 48.7% surge. Inflows into information and communication technology services remained particularly strong, with China, Hong Kong, and Singapore serving as the primary capital sources, according to McKinsey’s Southeast Asia quarterly economic review. Bank Negara Malaysia has held its policy rate steady following a pre-emptive 25 basis-point cut in July 2025, with headline inflation projected to average just 2.0% in 2026.

The Long Game: Semiconductors, Rare Earths, and Nuclear Power

Beyond RMK13’s near-term targets, Malaysian officials are positioning the country’s industrial strategy around decades, not years. Minister Akmal has reiterated commitments to eliminate coal use by 2044 and reach net zero by 2050, while confirming Malaysia is actively “exploring the potential” of nuclear power to meet the energy demands of its expanding data-center and semiconductor sectors. AMRO’s structural policy guidance urges Malaysia to develop domestic semiconductor and rare-earth capabilities as a hedge against ongoing US-China “geoeconomic fracturing,” positioning the country as a trusted neutral hub for global manufacturers diversifying away from concentrated exposure to either superpower.


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Analysis

Canada’s Central Bank Holds the Line at 2.25% as Tariffs and a Middle East Oil Shock Collide

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The Bank of Canada has maintained its policy rate at 2.25% for a consecutive meeting, navigating a rare combination of tariff-driven trade disruption and Middle East-driven energy inflation that is squeezing the economy from two directions at once, according to the Bank of Canada’s June 2026 rate announcement.

A Soft Economy Absorbing Two Shocks

Canadian GDP edged down 0.1% in the first quarter, weaker than the Bank’s April projection, even as global equity markets stayed buoyant and the Canadian dollar weakened against its US counterpart. Governing Council says it will “look through” the near-term inflation impact of the Middle East conflict but will not allow higher energy prices to become entrenched, a distinction the Bank has drawn explicitly to avoid repeating the policy mistakes of the 2021-22 inflation surge, per the Bank’s official statement.

The Bank’s April Monetary Policy Report forecasts GDP growth of just 1.2% in 2026, rising to 1.6% in 2027, as exports and business investment recover only gradually from a US tariff regime the Bank now treats as a structural, not cyclical, feature of the outlook, according to the Bank of Canada’s April 2026 report.

The Tariff Toll So Far

RBC Economics estimates the US has imposed a roughly 6% average effective tariff rate on Canadian exports, with most trade remaining exempt under CUSMA compliance rules, based on RBC’s structural-damage assessment. Steel, aluminum, and auto exports have declined sharply, while other sectors have proven more resilient than initially feared. HSB Pricing Lab research conducted with Bank of Canada staff found roughly a quarter of Canada’s own retaliatory tariff costs passed through to consumer prices before being rapidly unwound once most retaliatory measures were lifted.

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The Canada-United States-Mexico Agreement (CUSMA) review is, in the words of Desjardins Group economists, “the defining issue” of 2026 for Canadian policy, with FTSE Russell analysts suggesting the agreement is unlikely to survive in its current form even as the broader global trading system adapts around it, according to Yahoo Finance Canada’s economist survey.

Structural Damage, Not Just a Cyclical Dip

Bank of Canada officials have been unusually direct about the long-run cost of trade disruption. The Bank’s own commentary describes Canada’s potential output growth falling to roughly 1.0% in 2026 before a modest recovery to 1.3% in 2027, driven by both trade friction and slower population growth from reduced immigration, according to the Bank of Canada’s “Structural change” commentary. The labour market remains soft, with unemployment in the 6.5%–7% range reflecting weak hiring rather than mass layoffs — what Indeed Canada economist Brendon Bernard describes as a “low-hire, low-fire” dynamic.

Watching the Same AI Risk From Ottawa

Notably, the Bank of Canada’s own risk assessment flags the same concern now dominating global financial commentary: a “sudden tightening in global financial conditions sparked by a correction in AI related stock market valuations” as a distinct downside risk to its inflation projections, according to RBC’s analysis of the Bank’s scenario planning. That makes Canada one of the first G7 central banks to formally embed AI-valuation risk into its published monetary policy framework.

The Bank’s next rate decision and full Monetary Policy Report are due July 15, 2026.

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Analysis

Pakistan IMF Deal 2026: Third Review Cleared, Budget 2026-27 and Inflation Outlook

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The International Monetary Fund’s Executive Board has completed the third review of Pakistan’s Extended Fund Facility and the second review of its Resilience and Sustainability Facility, unlocking continued disbursements at a moment when the country’s external buffers remain thin but improving, according to the IMF’s official press release.

Fiscal Discipline Holding, Barely

Pakistan is on track to deliver a primary surplus of 1.6% of GDP in FY26, in line with program targets, while gross reserves climbed to $16 billion at end-December from $14.5 billion at end-June 2025. GDP growth in the first half of FY26 averaged 3.8% year-on-year, driven by the auto, construction, and garment industries, per the IMF’s Country Report No. 26/101.

Not every benchmark was met. A structural benchmark requiring amendments to the Sovereign Wealth Fund Act to align governance safeguards with international standards was missed, though the changes are pending Cabinet approval. A separate continuous benchmark barring preferential tax treatment was also missed after an extension of a sugar-import tax exemption, which authorities subsequently repealed.

The Middle East War’s Fiscal Bite

The IMF flags that Pakistan’s current account is projected to worsen by roughly 0.2 percentage points in FY26 and 0.4 points in FY27 as higher fuel-import costs are only partially offset by compressed non-oil imports. Under the Fund’s April 2026 adverse scenario, the cumulative hit to GDP could reach 1.5 percentage points by FY27, with inflation and current-account deterioration each roughly 1.5 to 2.5 percentage points worse than a pre-conflict baseline. Business Recorder separately reported the IMF lowering Pakistan’s growth forecast to 3.5% for the current fiscal year while raising the inflation projection to 8.4%, according to Business Recorder’s coverage.

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Revenue Mobilization Under Pressure

Meeting the FY27 fiscal target requires an additional 0.6% of GDP in revenue-collection measures to address chronically low tax buoyancy. The Federal Board of Revenue (FBR) is expected to generate 0.3% of GDP in additional revenue through its transformation plan and by streamlining tax expenditures, with an FBR revenue-collection floor proposed as a new quantitative performance criterion starting December 2026. At the provincial level, authorities are focused on broadening the General Sales Tax (GST) base for services.

Governance Costs Still Weighing on Growth

Pakistan’s economy loses an estimated 5–6.5% of GDP annually to corruption tied to entrenched “elite capture,” according to the IMF’s 2025 Governance and Corruption Diagnostic Assessment cited in Wikipedia’s economy of Pakistan overview. The IMF has urged continued momentum on anti-corruption institutions, state-owned enterprise reform and privatization, and energy-sector viability, alongside the broader structural reform push tied to the fund’s ongoing lending program.

For investors and businesses tracking Pakistan’s KSE-100 and rupee trajectory, the third review’s completion is a signal of continued program credibility, but the widening current-account gap tied to Middle East energy costs means the reform runway remains narrow.


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