By Moaaz Manzoor

Escalating tensions following the US-Israeli strikes on Iran are reverberating across global markets, raising fresh economic concerns for Pakistan as higher energy prices, inflation risks and volatile financial markets threaten to strain an economy heavily dependent on imported energy.

According to a research report titled “Middle East Shockwave: Oil First, Equities Second” released by Ismail Iqbal Securities (IIS), geopolitical shocks in the region historically lead to sharp but temporary volatility in Pakistan’s financial markets before stabilisation occurs.

Speaking with Wealth Pakistan, Waqas Ghani, Head of Research at JS Global Capital, said the initial reaction in Pakistan’s stock market was expected to be negative, though the scale of disruption surprised analysts.

“It was not expected that the market would halt. But the expectation was that there will be pressure,” he said, referring to the sharp reaction observed in trading activity.

Pakistan’s structural dependence on imported energy makes it particularly sensitive to Middle East conflicts. Ghani explained that the country imports a significant portion of its energy needs, noting that around 25% of Pakistan’s imports consist of oil. This reliance means any sustained surge in global crude prices can quickly translate into pressure on the external account and foreign exchange reserves.

“If oil goes from here to $100, if the war prolongs, there will be pressure on the external account, on our reserve situation,” Ghani said, adding that rising petroleum prices would also feed directly into domestic inflation.

He said higher fuel prices could quickly pass through to consumer prices. “Due to the prices of petroleum products, the inflation rate will increase by 0.5%. If we look at its second-round impact, the overall inflation rate can increase by 1-1.5%.” Currently, Pakistan is observing an inflation run rate of about 1%, but a prolonged conflict could significantly alter that trajectory.

The ripple effects extend beyond macroeconomic indicators. Pakistan’s corporate sector may also face margin pressure, as many listed companies rely on imported raw materials. Ghani noted that when global commodity prices rise broadly, production costs increase, squeezing company profitability and triggering sell-off pressure in equity markets.

Pakistan’s stock market has already reflected such uncertainty. The IIS Research report shows that the KSE-100 index has slipped 39,060 points, or 20.4%, from its record peak of 191,033 on January 26, 2026, to 151,973 on March 2, illustrating how geopolitical tensions can rapidly influence investor sentiment.

Syed Zafar Abass, Manager at Zahid Latif Securities, also warned that Pakistan’s energy imports make the country highly vulnerable to prolonged regional instability. Speaking with Wealth Pakistan, he said the conflict could disrupt Pakistan’s fuel supply dynamics.

“If this conflict continues for a long time, Pakistan's dependent import of oil will definitely have an impact on us,” he said, noting that the country is currently importing three to five LNG ships from Qatar in addition to crude oil shipments.

Abass emphasised that any sharp rise in crude oil prices would inevitably push up domestic fuel prices. “If crude oil prices shoot up, petrol, diesel and other oil prices will rise. It will have an impact on inflation,” he said.

He added that such inflationary pressures could derail expectations of monetary easing. Earlier discussions around bringing policy rates to a single-digit level may now face setbacks if inflation accelerates.

“In uncertain conditions, global stock markets react negatively, and our market is behaving the same way as the markets of the world. People are trying to pull their money and sit on cash,” Abass said.

Energy costs remain the primary transmission channel of geopolitical shocks. The IIS Research report notes that oil constitutes around 22-23% of Pakistan’s total import bill, and every $5 per barrel increase in crude prices adds roughly $875-$925 million to the annual import bill.

Despite these risks, the report suggests that historical trends indicate markets often stabilise once geopolitical tensions ease. However, if the conflict disrupts critical supply routes such as the Strait of Hormuz — a corridor through which roughly one-fifth of global oil trade passes — the economic impact could become significantly more severe.

For Pakistan, the evolving Middle East crisis therefore represents not only a geopolitical shock but also a test of economic resilience for an energy-dependent economy already navigating fragile macroeconomic conditions.

Credit: INP-WealthPk