Pakistan flagged as most vulnerable economy if Middle East conflict is prolonged

S&P Global Market Intelligence has flagged Pakistan as the most vulnerable economy in the Asia-Pacific region to prolonged conflict in the Middle East, warning of severe macro-financial stress. The assessment highlights Pakistan’s near-total dependence on Gulf crude supplies, heavy reliance on remittances from Gulf Cooperation Council (GCC) countries, and limited fiscal space as key vulnerabilities. The report projects Pakistan’s real GDP growth to ease to 3.2% in fiscal year 2027, with risks skewed downward due to regional instability. Higher energy prices and supply chain disruptions are expected to reverse recent current account improvements, increase currency depreciation pressures, and sustain elevated inflation. The report notes that while initial policy responses mitigated some supply shocks, future trade-offs between stability, growth, and fiscal consolidation under existing IMF programs will become increasingly difficult. External financing risks remain high, with gross financing needs averaging USD 24 billion annually from 2026 to 2030, including a recent USD 3.5 billion repayment to the UAE. Sectoral impacts include manufacturing and export slowdowns due to rising input costs, fertilizer shortages, and moderated remittance growth, which could reduce farmers’ incomes and crop yields. The second-round effects of energy price inflation are projected to suppress private consumption, particularly in transport and retail sectors. The report underscores that Pakistan’s exposure is amplified by its limited external and fiscal buffers, despite recent strengthening from a new Saudi deposit and IMF-linked financing. Principal Economist Ahmad Mobeen emphasized that Pakistan faces acute risks from its reliance on imported energy and industrial inputs from the conflict zone, combined with constrained financial buffers. The assessment warns that without additional bilateral or multilateral funding, sustaining stability, growth, and fiscal consolidation will become progressively challenging.