The war in the Middle East has rewritten the rules of global energy markets. For Pakistan, the question is whether Washington’s premier lender will rewrite the rules of fiscal discipline—and whether doing so would actually help.

The morning commute in Karachi tells you everything macroeconomic models cannot. On Shahrah-e-Faisal, rickshaw drivers pause to do the math in their heads—fuel costs up, fares contested, margins evaporating. At the city’s truck terminals, hauliers who move food from Sindh’s agricultural belt to urban markets are quietly adding surcharges that will ripple through every vegetable market from Lyari to Gulshan. The war in the Middle East, detonated by the February 28, 2026 joint US-Israeli air campaign against Iran and Iran’s subsequent closure of the Strait of Hormuz, has not remained a distant geopolitical abstraction. It has arrived at the petrol pump, in the grocery bill, and now—most consequentially—inside the negotiating rooms where Pakistan and the International Monetary Fund are working through the terms of the country’s $7 billion Extended Fund Facility.

The question gaining urgency among Islamabad’s policymakers, economists, and the public alike is a deceptively simple one: given an energy shock of unprecedented historical scale, will the IMF relax its strict conditions on fuel subsidies for Pakistan? The honest answer, grounded in both economics and political reality, is: modestly, carefully, and only at the margins. And that is almost certainly the right call—even if it makes for uncomfortable politics in a country where energy prices are already a flashpoint.

An Energy Shock With No Historical Precedent

To understand why Islamabad is under such enormous pressure, one must first grasp the scale of what has happened to global oil markets since late February. The closure of the Strait of Hormuz—through which roughly 27% of the world’s seaborne oil trade and 20% of global LNG volumes transited before the conflict—represents, in the words of the International Energy Agency’s Executive Director, “the greatest threat to global energy security in history.” This is not rhetorical escalation. It is arithmetic.

Crude and oil product flows through the Strait plunged from around 20 million barrels per day before the war to just over 2 million by mid-March. Gulf countries, with storage filling rapidly and exports stranded, have cut total output by more than 14 million barrels per day. Brent crude, which traded at $71.32 per barrel on February 27, 2026, surged more than 55%, briefly touching nearly $120 a barrel at its peak—a pace of appreciation that March 2026 will record as one of the largest single-month oil price jumps in market history. As of late April, with the Strait’s status oscillating between partial reopening and fresh episodes of Iranian interdiction, Brent remains anchored in the $80–$92 range with no durable resolution in sight, and commodity analysts warn that sustained supply chain bottlenecks could keep markets tight regardless of any ceasefire.

For energy-importing developing nations, the IMF itself frames this precisely. In a landmark March 30 blog signed by eight of the Fund’s regional directors—including Western Hemisphere Director Rodrigo Valdés—the authors warn that “all roads lead to higher prices and slower growth,” with energy-importing economies in Asia and Africa facing the effect of a “large, sudden tax on income.” Pakistan, almost entirely dependent on imported crude and LNG, sits squarely in the crosshairs.

Pakistan’s Fiscal Tightrope: The Numbers Behind the Negotiations

Against this backdrop, Pakistan’s position is structurally precarious. The country carries a fiscal deficit projected at approximately 3.2% of GDP for FY26 and FY27, with government revenues expected to remain roughly stable at 15.8% of GDP—a ratio that leaves vanishingly little room for unbudgeted expenditure shocks. Public debt remains elevated. Foreign exchange reserves, though recovering relative to the 2022–23 crisis lows, are still fragile enough that the IMF has explicitly stated that exchange rate flexibility should remain the primary shock absorber against Middle East spillovers—a polite way of saying Islamabad cannot afford to defend the rupee while simultaneously subsidizing petrol.

The political impulse to do exactly that has nonetheless proven irresistible. Prime Minister Shehbaz Sharif’s government has, over recent months, reintroduced fuel subsidies—cutting petrol prices by Rs80 per litre at one point—and held the Petroleum Development Levy (PDL) on diesel at effectively zero, against a budgeted target of Rs80 per litre. Fuel subsidies had risen to Rs125 billion by April 3, 2026, with the government committing to a Rs152 billion cap and scrambling to find fiscal offsets through cuts to the development budget and Rs27 billion in savings from reduced government fuel allowances.

The IMF, for its part, is not unmoved by the humanitarian dimension—but it remains unyielding on the fiscal logic. Mission Chief Iva Petrova stated explicitly at the conclusion of the March third-review discussions that “energy price subsidies should be avoided due to their high fiscal cost and distortionary effects,” and that “sustainability is maintained through timely tariff adjustments that ensure cost recovery.” The staff-level agreement for the third review, reached on March 27 and scheduled for Executive Board approval on May 8 to unlock approximately $1.2 billion in disbursements, was reached against a backdrop of ongoing negotiations over fuel pricing parameters that are expected to shape the upcoming federal budget.

The IMF’s April 2026 Fiscal Monitor, meanwhile, advised Pakistan to gradually phase out fuel subsidies, address contingent liabilities, and expand its tax base to ensure medium-term fiscal sustainability. The Fund warned that sustained fiscal consolidation would require structural reforms, including broadening the tax base and reducing reliance on subsidies, and that Pakistan’s primary surplus—estimated at 2.5% of GDP for FY26—is projected to decline to just 0.1% by FY31 without further reform action. These numbers tell a story of structural fragility that no amount of war-emergency rhetoric can paper over.

The Case Against Broad Subsidies: Why the IMF Is Right to Hold Firm

Fuel subsidies are, from an economist’s perspective, almost perfectly designed instruments for achieving the wrong outcomes. They are regressive—higher-income households, who own more vehicles and consume more fuel per capita, capture a disproportionate share of the benefit. They distort price signals, discouraging conservation and investment in alternatives precisely when the supply shock argues for both. They are fiscally corrosive: Pakistan’s government revenues running at 15.8% of GDP cannot sustainably absorb an open-ended commitment to international oil prices while simultaneously funding the security, education, and health expenditures a 240 million-person nation requires.

There is, moreover, a cautionary precedent from a strikingly similar juncture. When Russia’s 2022 invasion of Ukraine triggered global commodity price surges, a number of emerging markets—from Egypt to Sri Lanka to Pakistan itself—responded with broad-based fuel subsidies. In every case, the fiscal cost proved larger than anticipated, the inflationary feedback loop proved faster than modelled, and the political economy of subsidy removal proved dramatically more costly after a period of entrenchment than it would have been with targeted relief from the outset. Sri Lanka’s fiscal collapse, in particular, demonstrated how subsidy-driven balance-of-payments deterioration can accelerate from a manageable deficit challenge to a full-scale reserve crisis with frightening speed. Pakistan, in 2022, required emergency IMF intervention partly because of this dynamic. Repeating the experiment with a weaker fiscal position and a larger external shock would be economically reckless.

The IMF Fiscal Monitor’s warning that “revenue growth has likely peaked” carries particular weight in this context. If Pakistan’s tax-to-GDP ratio, already among the lowest in South Asia at roughly 10-11%, cannot be meaningfully raised in coming years, then subsidy expenditures crowd out the very social investments—health, education, early childhood development—that translate economic growth into human development. The war emergency does not suspend this structural logic; it intensifies it.

What the IMF Should Do—and What Islamabad Should Ask For

The argument that broad fuel subsidies are counterproductive does not imply that the IMF should ignore the human reality on Karachi’s streets. There is a meaningful distinction, however, between comprehensive price suppression—which primarily benefits the non-poor—and targeted, temporary relief for vulnerable households. And here, encouragingly, both the IMF and Pakistan’s government have identified the right mechanism, even if the sequencing and scale remain contested.

The Benazir Income Support Programme (BISP) is among the better-designed cash transfer systems in South Asia. As part of the new programme conditions, the IMF has already asked Pakistan to increase BISP quarterly payments by 35%—raising stipends from Rs14,500 to Rs19,500 starting January 2027—a meaningful improvement, though one that may not fully offset middle-income household burden. Islamabad should push, firmly and with economic evidence, for a faster and more generous BISP uplift. This is the correct instrument for a war-emergency response: fiscally bounded, targeted to those who actually need relief, and capable of being wound down as the oil shock dissipates without creating the entrenched price distortions that fuel subsidies inevitably generate.

The IMF, for its part, should show flexibility in how fiscal targets are achieved during an external shock of this magnitude, even while holding firm on whether they are achieved. There is genuine economic justification for allowing some degree of automatic stabiliser functioning—accepting a temporary deficit overshoot if revenues fall short due to slower growth, rather than demanding pro-cyclical fiscal tightening in the middle of an energy crisis. The Fund’s own Fiscal Monitor acknowledges that the Middle East conflict “could lead to higher energy prices, tighter financial conditions and increased inflationary pressures” that strain government finances. Acknowledging this in the programme design—with explicit clauses for temporary deviation if oil prices remain above a defined threshold—would be a sophisticated policy response. It would also be consistent with IMF practice during the COVID emergency waivers of 2020–2021.

Concrete policy recommendations for Islamabad:

• Accelerate BISP expansion now, rather than after January 2027; propose a dedicated emergency supplementary tranche for the war-shock period, financed by the fiscal savings already generated from development budget rationalisation.
• Maintain petroleum levy on petrol at the Rs100/litre level and work with provinces to restore the diesel levy to the Rs55/litre target on a time-bound schedule, insulating revenue flows from the war’s uncertainty.
• Negotiate an oil price contingency clause within the EFF framework: if Brent remains above $95 per barrel for more than 60 consecutive days, a pre-agreed, temporary widening of the deficit target—funded by provincial surplus sharing rather than central bank financing—takes effect automatically.
• Fast-track tariff rationalisation in the power sector to reduce circular debt accumulation; the energy sector’s fiscal drag is structurally more damaging than the current fuel subsidy debate.
• Resist the political pressure to freeze petrol prices indefinitely. Each month of price freeze embeds a larger future adjustment, and experience shows that deferred adjustment is always more painful—economically and politically—than managed, incremental change.

The Geopolitical Dimension: Leverage, Moral Hazard, and the Long Game

There is an argument, sometimes advanced in Islamabad’s policy circles, that Pakistan’s geopolitical weight—its nuclear status, its strategic location, its diplomatic role in US-Iran mediation talks (with US Vice President JD Vance and Steve Witkoff reportedly transiting Islamabad for negotiation rounds)—gives it leverage to extract more lenient IMF terms. This argument deserves neither complete dismissal nor uncritical acceptance.

It is true that the Fund operates in a political economy, and that strategically significant states have historically received more patient treatment than smaller, less geopolitically consequential debtors. It is equally true, however, that moral hazard is a serious constraint on IMF flexibility. If Pakistan secures significant subsidy-related waivers on the basis of war-emergency argumentation, it establishes a precedent—for itself in future programme negotiations, and for other emerging markets observing the dynamic—that external shocks are sufficient to suspend fiscal conditionality. The long-run cost of that precedent almost certainly exceeds the short-run benefit of a relaxed petroleum levy target.

The IMF’s own research—including the March 30 blog by Rodrigo Valdés and colleagues—is explicit that the war shock is asymmetric: it hurts energy importers more than exporters, and poorer countries more than richer ones. But the Fund’s recommended response to this asymmetry is not price suppression—it is enhanced social protection, exchange rate flexibility, and where available, additional concessional financing. Pakistan has access to the Resilience and Sustainability Facility, which is precisely designed for climate and external shock resilience. Islamabad should explore whether the RSF’s parameters can be stretched to address a conflict-driven energy emergency, a creative use of existing instruments that might yield more than a pitched battle over petroleum levy targets.

The Forward Path: Resilience Requires Reform, Not Relief

The immediate crisis will pass—eventually. Commodity analysts already note that any durable reopening of the Strait of Hormuz would likely trigger an immediate $10–$20 per barrel drop in crude prices, with Brent likely settling in the $80–$90 range even with lingering supply chain disruption. Pakistan’s current account pressures should ease materially when that happens. The question that will define Pakistan’s medium-term economic trajectory, however, is what structural architecture remains in place when the storm breaks.

The IMF’s next-programme thinking—already forming as the current EFF winds down—targets a 2% primary surplus, broader taxation of agriculture, exporters, IT, real estate and retail, and the definitive phase-out of fuel subsidies. These are not punitive demands. They are the minimum structural conditions for a country with Pakistan’s demographic profile and development aspirations to maintain any semblance of fiscal sovereignty. A government that can shelter its poorest citizens through well-targeted transfers, collect taxes from all productive sectors of its economy, and price energy at cost-reflective levels is a government that does not need to go cap-in-hand to Washington every two years. That is, ultimately, what genuine economic independence looks like.

The war in the Middle East is a tragedy measured in lives, livelihoods, and the slow-motion unravelling of a regional order that—whatever its imperfections—sustained the energy infrastructure on which billions of people depend. For Pakistan, it is also a test: of the political maturity to distinguish between legitimate emergency relief and structural dependence; of the administrative capacity to deliver targeted cash transfers faster than political pressure demands across-the-board price freezes; and of the diplomatic skill to negotiate flexibility within a programme framework without triggering a breakdown that would cost far more than the subsidy revenue being contested.

The rickshaw driver on Shahrah-e-Faisal deserves protection from an energy price shock he had no hand in causing. He deserves it through a direct transfer to his pocket—not through a subsidy that flows, at perhaps five times the fiscal cost, to the executive at Clifton who fills up his Fortuner. Getting that distinction right, under pressure, in the middle of a war, is the task before Pakistan’s policymakers and their IMF interlocutors alike. It will not be easy. But it is the only path that ends somewhere better than another crisis.