Pakistan could face an economic shock of up to $68 billion if the conflict in the Middle East persists and the Strait of Hormuz remains closed for an extended period, according to a presentation by the Policy Research Institute of Market Economy (PRIME) to Pakistan's National Assembly Standing Committee on Finance. The findings, cited by Business Recorder, outline three escalation scenarios ranging from a quick resolution to a prolonged crisis that could wipe out nearly 17 per cent of the country's GDP.

Three Scenarios and Their Economic Cost

In the most benign scenario, where hostilities ease quickly and the Strait of Hormuz reopens soon, the estimated economic cost to Pakistan is approximately $10 billion, equivalent to 2.5 per cent of GDP. The second scenario assumes the conflict continues for another three months, pushing the economic burden to between $24 billion and $32 billion, or nearly 8 per cent of GDP.

In the worst-case scenario — involving a prolonged closure of the strategic waterway and crude oil prices surging to $150 per barrel — the total cost could climb to between $50 billion and $68 billion, nearly 17 per cent of GDP. This is the scenario PRIME warns could push Pakistan into a full-blown financial crisis.

External Sector Under Severe Pressure

PRIME's analysis focuses primarily on Pakistan's external sector, flagging a triple threat: rising import costs, declining exports, and lower remittance inflows. Together, these pressures could sharply weaken the country's balance of payments position and rapidly drain its foreign exchange reserves.

Pakistan's current foreign exchange reserves stand at approximately $15 billion — a figure the report describes as insufficient to finance a widening current account deficit under the severe scenario. According to the report, the financing gap in that case could become unsustainable, even with an active IMF programme in place.

Inflation Could Spike to 18 Per Cent

Inflationary pressures are also projected to intensify significantly. Even under the mild scenario, the report estimates inflation could reach around 10 per cent. A prolonged crisis, driven largely by currency depreciation and rising food and energy prices, could push inflation to between 15 per cent and 18 per cent, the report warns.

This comes amid Pakistan's already fragile macroeconomic recovery, which has relied heavily on IMF-backed fiscal consolidation. A sustained external shock of this magnitude would test the limits of that programme and potentially force a renegotiation of its terms.

Strategic Significance of the Strait of Hormuz

The Strait of Hormuz, which connects the Persian Gulf to the Gulf of Oman, is one of the world's most critical energy chokepoints. Approximately 20 per cent of global oil supply passes through it. For energy-import-dependent economies like Pakistan, any prolonged disruption translates directly into fuel shortages, higher import bills, and currency stress. Notably, Pakistan's energy import dependence makes it among the most exposed South Asian economies to a Hormuz closure.

What Happens Next

The PRIME presentation was made to Pakistan's parliamentary finance committee, signalling that policymakers are actively stress-testing the country's economic resilience. Whether the government acts on these projections — by building reserve buffers, negotiating emergency credit lines, or accelerating energy diversification — remains to be seen. With the Middle East conflict showing no clear signs of de-escalation, the window to prepare may be narrowing.