KARACHI: A fresh oil price shock triggered by the US-Israel war on Iran threatens to reignite inflation in Pakistan, raising costs for farmers, retailers and consumers while testing the government’s claims of fiscal stability.
“The burden of the petrol price hike falls on the consumer, and that’s why inflation has again started raging in Pakistan,” said economist, businessman and politician Miftah Ismail.
While the Pakistan Economic Survey states that “the government also delivered one of the strongest fiscal performances in recent years”, it does not fully capture the impact of the conflict, which triggered a global oil price shock whose effects have reverberated worldwide, including in Pakistan.
This is partly because the survey records actual data only from July to April, while figures for May and June are estimated, and partly because the consequences of the conflict are likely to continue to be felt in the months ahead.
Before the latest regional conflict, Brent crude averaged around $70 per barrel. During the crisis, prices briefly touched $120 before stabilising. The Pakistan Economic Survey, citing International Monetary Fund projections, expects oil prices to average about $82 per barrel this year, a rise of more than 21 per cent.
As oil prices remain elevated, the impact will be felt across sectors and borne by the common man.
Impact on agriculture
Farmers are among the first to feel the impact and ultimately pass it on to consumers through higher food prices, said farmer and development professional Khalid Wattoo.
Diesel accounts for roughly 20pc of production costs because land preparation, irrigation and harvesting have become increasingly mechanised.
Higher fuel prices also push up fertiliser costs because natural gas and oil markets are closely linked. At the same time, global supply disruptions following the closure of the Strait of Hormuz have added further pressure.
While Pakistan’s urea plants operate on domestic natural gas rather than imported LNG, the country remains heavily reliant on imported fertiliser, particularly DAP.
Urea and DAP together account for around 80pc of fertiliser use in Pakistan. DAP alone made up 96pc of total fertiliser import volumes, with almost half of domestic demand met through imports.
“When I heard that the war had broken out, I imported enough fertiliser to last till October,” said Mr Wattoo, explaining what may partly be behind the 17pc increase in fertiliser offtake recorded in the survey.
Those with the financial means, including large farmers and stockists, have been building inventories in anticipation of future shortages.
“If the war continues, prices will rise further, and like a mafia, people will start shorting supplies,” he said.
Impact on the retail sector
The pressure is not limited to agriculture.
Sales were already under strain, down 10-15pc, before the Middle East conflict triggered the latest oil price shock, said Pakistan Retail Business Council Chairman and Gul Ahmed director Ziad Bashir.
Over-taxation, “super” high compliance costs, smuggled goods and input costs that had already crept up by 8-10pc had squeezed retail margins from both ends.
“Early mall closures to conserve supplies don’t just cut our hours, they cut our best hours. Meanwhile, our input costs are up, our selling window is down and the undocumented sector flourishes and makes a windfall. We compete fully taxed, fully compliant and fully disadvantaged,” Mr Bashir said.
According to Mr Ismail, the increase in domestic fuel prices has been significantly larger than the rise in international oil prices and greater than what has been witnessed in many regional countries.
“The government has used this occasion to first give greater profits to oil marketing companies and then to refineries. It has also taken advantage of this crisis and jacked up the petroleum levy,” he said.
Estimates suggest that every $10 increase in oil prices adds roughly $1.8bn to $2bn to Pakistan’s annual import bill.
The resulting price shock is transmitted to consumers through higher petrol prices, a burden compounded by increases in the petroleum levy as the government seeks to meet its revenue targets.
Repeating cycles
Pakistan has been here before. The Economic Survey itself recounts episodes in FY08, FY11, FY18 and FY22 when external oil shocks placed severe pressure on the import bill and wider economy.
So far, however, the rise in international crude prices has not translated into import growth to the same extent as seen during previous episodes.
According to the survey, import growth in FY26 was driven more by non-petroleum items, reflecting a revival in economic activity and stronger demand for production-related inputs.
Yet some economists warn that a familiar cycle may already be taking shape.
A recent paper by the Policy Research and Advisory Council argues that the government is injecting cost-push inflation into the economy through increases in the petroleum levy. As inflation accelerates, the State Bank may be forced to respond with tighter monetary policy.
The result is a cycle Pakistan knows well: fiscal measures fuel inflation, monetary tightening suppresses demand, economic activity slows, tax collection weakens and the burden ultimately falls back on households and businesses.
Published in Dawn, June 12th, 2026