Dr Bilawal Kamran
When a war breaks out thousands of miles away, its consequences do not stay there. They travel through pipelines, across shipping lanes, into fuel stations, and eventually into the pockets of ordinary citizens who have no stake in the conflict and no voice in its resolution. Pakistan is learning this lesson again, as the Middle East war enters its fifth week and the country’s already fragile economy absorbs shocks it can barely afford.
The Prime Minister’s decision to freeze petrol prices through a fuel subsidy was, in human terms, the right instinct. Rising international petroleum prices, driven directly by the disruption of supply routes in the Gulf, would have fallen hardest on those least equipped to bear them. The announcement offered a buffer, a signal that the government would not stand aside while household budgets collapsed under the weight of an externally manufactured crisis. All four chief ministers have endorsed the arrangement to share the subsidy burden across federal and provincial governments, which is itself a rare and welcome moment of inter-governmental solidarity. Whether the Prime Minister consulted the provinces before making his announcement is a question of process. That the provinces agreed is what matters for now.
But solidarity costs money, and money is precisely what Pakistan does not have in abundance.
The subsidy’s final price tag cannot yet be calculated with any precision because no one knows how long the Middle East conflict will last. Every week that the Strait of Hormuz remains disrupted, every week that global oil markets remain rattled, is another week that Pakistan must absorb the difference between the actual cost of fuel and the price it has pledged not to charge its citizens. The Prime Minister gave a commitment. The markets gave no such assurance. That gap between promise and reality is being filled with borrowed room that Pakistan can barely afford to borrow.
This country has lived with a narrow fiscal space for decades. It is not a new problem. It is, in many respects, the defining structural feature of Pakistan’s economic life. Of the twenty-four International Monetary Fund programmes Pakistan has entered since independence, nearly every one has identified fiscal compression as a central concern. The current thirty-six month Extended Fund Facility is no different. The rules of such programmes do not bend easily for external shocks, and the IMF has already projected that the Middle East conflict will reduce global GDP growth. A shrinking global economy means shrinking trade volumes, shrinking investment flows, and for Pakistan, shrinking tax revenues.
The Federal Board of Revenue had already reported a tax shortfall of four hundred and fifty-seven billion rupees through February 2026, and that figure predates the outbreak of hostilities on the twenty-eighth of February. What the March numbers will reveal is not difficult to anticipate. When output contracts, when imports slow because foreign exchange reserves are under pressure, when consumer confidence falters, the collections from sales tax, customs duty, and excise all decline in tandem. Pakistan’s revenue base is not built on the ability-to-pay principle. It rests heavily on indirect taxes because they are easier to collect, not because they are fair. That structural choice means that any economic contraction immediately and disproportionately damages the government’s finances while also hitting the poorest consumers hardest.
The foreign exchange position compounds the problem. The State Bank’s reserves are, in large part, borrowed money: rollovers from friendly governments, drawings from multilateral institutions, and bilateral credit lines. These reserves do not represent accumulated national wealth. They represent deferred obligations. When import costs rise because oil prices spike, those reserves face pressure from two directions simultaneously: higher outflows for energy imports and reduced inflows as global uncertainty dampens investment. The consequence is a constrained capacity to import raw materials and semi-finished goods, which reduces industrial output, which reduces tax collection, which deepens the fiscal deficit. The chain of causation is straightforward and punishing.
To manage the immediate crisis, the government announced a cut of one hundred billion rupees from the Public Sector Development Programme to fund the fuel subsidies. This is not a new tactic. Pakistani governments across administrations have routinely overstated their development budgets at the time of announcement, projecting an image of ambition and commitment to infrastructure and growth, only to slash those same allocations as the fiscal year progresses and deficits widen. Development spending is politically easier to cut than salaries or debt servicing. It leaves no immediate protest on the streets, even though its long-term cost in foregone growth is substantial. The government had already begun trimming the development budget before the Middle East conflict began, which means the one hundred billion rupee cut for fuel subsidies was not a response to a crisis: it was an acceleration of a process already underway.
The Prime Minister also announced an austerity package. A PM Austerity Fund has been established, with an initial release of twenty-seven billion rupees. The savings projected from the broader austerity measures may prove optimistic, as austerity projections in Pakistan historically tend to be. Before the conflict ends, the government may find itself requiring some creative accounting to satisfy IMF conditions without technically breaching the programme’s targets. That is not a comfortable position for an economy that depends on IMF credibility for its continued access to international capital markets.
The structural remedy is neither mysterious nor novel, but it requires a discipline that Pakistani governments have consistently found difficult to sustain. Current expenditure must be cut meaningfully and maintained at lower levels for two to three years. The savings created must not be redirected into subsidies or short-term relief but used to reduce dependence on both domestic and external borrowing. Simultaneously, the tax system must be reformed from its roots: broadened, made progressive, aligned with the ability-to-pay principle, and stripped of the anomalies and exemptions that have made it both inequitable and inefficient.
Pakistan did not start this war. It has no power to end it. But the choices it makes inside its own borders, in the next budget, the next austerity package, the next IMF review, will determine whether this external shock becomes a manageable episode or another step in a longer descent. The government owes the public more than a fuel subsidy. It owes them a serious plan.
