Pakistan’s economic managers had begun to celebrate signs of economic stability, including easing inflation, rising foreign exchange reserves, a stable currency and a recorded current account surplus after a decade.

The recent escalation between the US-Israel and Iran, however, casts doubt on this fragile progress. Rising tensions in the Persian Gulf carry significant implications for Pakistan. 

Gulf countries are not only the primary source of energy imports but also the destination for millions of Pakistanis in the diaspora and a key source of financial support during economic distress. Any instability in the region, therefore, directly translates into external-sector fragility in Pakistan.

The choking of the Hormuz Strait and attacks on Gulf countries have adversely impacted the global oil supplies. Pakistan, which fulfils about 81% of its oil imports from the Persian Gulf through the Hormuz Strait, represents the most immediate channel of vulnerability. Trade data shows the extent of this dependence.

The ITC Trade Map reports that imports from Gulf countries were approximately $17.1 billion in 2024. Out of the total, about $13.96 billion accounted for crude oil and petroleum products. Energy alone, therefore, constitutes nearly 81.6% of Pakistan’s imports from the Persian Gulf and around 24.7% of Pakistan’s total import bill in 2024.

Brent crude traded close to $70 per barrel in late February before the war. Within days, prices increased by about 34% to $106 per barrel. Pakistan imports more than four-fifths of its oil requirements. Any fluctuations in international energy markets quickly translate into higher import costs. This concentration tells us how closely Pakistan’s balance of payments is linked to developments in Gulf energy markets.

Any disturbance to shipping routes through the Strait of Hormuz or sustained increases in oil prices immediately affect Pakistan’s foreign exchange position. The current $36-per-barrel rise, as predicted, will substantially increase Pakistan’s oil import bill.

Besides the direct increase in oil costs, the surge in shipping insurance premiums and a repricing of freight costs have further driven prices higher. These developments may complicate economic management for a country that is still rebuilding its foreign exchange reserves.

Besides oil imports, remittances are the second-largest channel and a lifeline for the country’s foreign-exchange reserves. The country heavily depends on these inflows to manage its chronic balance-of-payments difficulties. According to SBP’s recent statistics, Pakistan received approximately $38.3 billion in remittances in FY2025.

Of $38.3 billion, nearly 54.5%, or $20.89 billion, originated from the six Gulf Cooperation Council (GCC) countries. Saudi Arabia was the top remittances source in the corridor, accounting for about $9.35 billion (24.4% of the total), followed by the UAE at $7.83 billion (roughly 20.4%). Additional inflows came from Oman ($1.32 billion), Qatar ($1.06 billion), Kuwait ($0.85 billion) and Bahrain ($0.48 billion).

According to the United Nations Department of Economic and Social Affairs, Pakistan had roughly 6.9 million migrants living abroad in 2024. Out of which, GCC countries host about 3.85 million, constituting around 55.7% of Pakistan’s diaspora. The diaspora sent remittances, which have traditionally stabilised Pakistan’s economy during periods of domestic crises.

During periods of high inflation and economic hardship, overseas Pakistanis sent more remittances to support their families back home, a phenomenon referred to as countercyclical. These inflows help to sustain consumption and support the exchange rate. It also partially offset the country’s persistent trade deficit.

The current situation introduces a different challenge, however. Economic uncertainty is emerging within the very region that generates the majority of these remittances. Slowdowns in Gulf economies can affect sectors that employ large numbers of migrant workers. The construction, transport, and service industries account for a large share of migrant employment.

The composition of Pakistan’s migrant workforce reinforces this vulnerability. Data from the Bureau of Emigration and Overseas Employment shows that most Pakistani workers leaving for overseas employment belong to low or semi-skilled occupations. In 2025, labourers accounted for 465,138 registered workers, representing about 61%t of the total. Drivers were the second-largest category, with 163,718 workers, or around 21.47%.

Together, these two occupations represent more than four-fifths of Pakistan’s migrant labour force. Other categories include supervisors or foremen (14,305 workers), technicians (12,703 workers), managers (11,777 workers), cooks (10,503 workers), and salesmen (9,034 workers). Skilled trades, such as electricians (6,475 workers), engineers (5,946 workers), masons (5,700 workers), mechanics (4,961 workers) and carpenters (4,078 workers), account for smaller shares of overseas migration.

Workers in construction and manual services often depend on project-based employment. Economic uncertainty can slow infrastructure activity and reduce labour demand. Migrant workers in these sectors frequently experience layoffs or reduced income during downturns. Rising living costs across Gulf cities also reduce expatriates’ capacity to save and remit funds.

Previous crises show how quickly such pressures can affect Pakistan. During the early 1990s Gulf crisis, many Pakistani workers returned home as job opportunities declined, reducing remittances and raising unemployment. A similar scenario today can also trigger such hardships for the country.

Pakistan’s relations with GCC economies extend beyond energy and remittances. Saudi Arabia and the UAE have frequently provided financial support to the country during periods of economic stress. They have deposited in the State Bank of Pakistan and provided deferred oil payment facilities, which have stabilised the economy in earlier crises.

Regional instability may reduce the likelihood of such assistance.

The question is: has Pakistan achieved recent macroeconomic stabilisation through structural changes or by implementing austerity measures and demand compressions?

The country lacks structural changes, which is a deep concern for the economy. Fiscal space remains very limited and the country’s dependence on imported energy, remittance inflows and external financing continues to shape its economic performance. These structural features leave Pakistan vulnerable to external shocks. Higher oil prices will exacerbate inflation, which was recently tamed. Weak remittance inflows will put severe pressure on the foreign exchange reserves.

Pakistan’s economic outlook remains closely linked to developments in the Gulf. Pakistan will face a multitude of problems, including a high import bill due to rising oil prices and a likely reduction in remittances. These pressures reveal how heavily the country depends on external conditions that it cannot control. So, what is the way forward? The country should not put all the eggs in one basket, and that’s why diversification of both export and import markets is the need of the hour.

As far as energy is concerned, the country has to incentivise renewable energy sources, such as solar installations, since it relies on fossil fuels for 62% of its energy production. This step can substantially reduce its import bill. The country also has to expedite the CASA-1000 project and the TAPI pipeline to diversify its energy needs.

To cope with the remittances shock, upskilling of the expatriates will do the trick, as skilled workers are less prone to shocks. Long-term stability requires reducing these dependencies. Without improving the domestic capacity, the country will find itself in hot water every time. Every episode of regional instability will continue to threaten Pakistan’s fragile economic stability.

Dr Junaid Ahmed is chief of research at PIDE. He can be reached at: [email protected] Wajid Islam is a research economist at PIDE. He can be reached at: [email protected]

Disclaimer: The viewpoints expressed in this piece are the writer’s own and don’t necessarily reflect Geo.tv’s editorial policy.

Originally published in The News