Pakistan Faces Inflation, Growth Risks as Oil Prices Surge Amid Middle East Conflict: Analysts

Karachi — Pakistan’s economy could face renewed inflationary pressure, slower economic growth, and a widening current account deficit if global oil prices remain elevated due to the ongoing Middle East conflict, according to a new report released by Topline Securities.

In its latest “Pakistan Strategy” report, the brokerage warned that prolonged regional tensions and rising energy costs are already placing pressure on Pakistan’s external sector and economic outlook.

Analysts projected that if crude oil prices remain around $100 per barrel, Pakistan’s average inflation over the next 12 months could reach 9–10 percent, while inflation during the fourth quarter of FY26 may exceed 11 percent.

The report noted that every additional $10 increase in oil prices could add nearly 50 basis points to inflation projections. If prices climb to $120 per barrel, annual inflation could rise to 10–11pc, potentially forcing the State Bank of Pakistan to increase policy rates further to contain inflationary pressures and maintain positive real returns.

Economic Growth Outlook Weakens

Due to higher energy costs and economic uncertainty, Topline Securities revised down Pakistan’s GDP growth forecast for FY27 to 2.5–3pc from an earlier estimate of 4pc.

The report maintained FY26 growth expectations at 3.5–4pc, in line with revised projections from the central bank.

Sector-wise, industrial growth could decline to 1pc from 3.9pc, while services sector growth may slow to 2.8pc from 4pc. Agricultural growth is also expected to weaken slightly.

However, analysts said economic growth could stabilise around 3.5–4pc if regional tensions ease during FY27.

Current Account and Fiscal Pressures

The report warned that Pakistan’s current account deficit (CAD) could remain below $3.5 billion in FY27 only if the government continues administrative measures to control imports.

Without effective intervention, the CAD could exceed $8bn, increasing pressure on foreign exchange reserves and the Pakistani rupee.

Analysts also estimated Pakistan’s fiscal deficit for FY26 and FY27 could remain between 4pc and 4.5pc of GDP, slightly above the International Monetary Fund’s target.

The rupee is expected to depreciate gradually, with forecasts placing the dollar exchange rate between Rs294 and Rs298 by the end of FY27 under controlled conditions. However, prolonged geopolitical instability may trigger sharper currency losses.

PSX Among Worst Performing Markets

The report highlighted that the KSE-100 Index has declined 14pc from its January 2026 peak and remains one of the worst-performing stock markets globally this year due to rising oil prices, geopolitical uncertainty, and investor profit-taking.

Pakistan’s heavy reliance on imported energy — with nearly 85pc of petroleum requirements sourced from abroad — remains a major vulnerability. Petroleum imports are projected to reach $15bn in FY26, accounting for around 22pc of total imports.

Key Sectors May Benefit

Despite broader economic risks, analysts said certain sectors could perform better under high oil price conditions.

Exploration and production (E&P) companies may benefit from stronger energy prices, while fertiliser firms could gain from higher international urea prices and improved domestic margins.

Banks are also expected to benefit from higher interest rates through improved lending spreads.

Meanwhile, the report projected that non-oil imports could decline by 8pc in FY27 if government controls remain in place, while petroleum consumption may fall by 12pc due to higher fuel prices.

Remittances are expected to decline by 3.5pc, particularly due to weaker inflows from Gulf countries, while exports may contract by 4pc amid slowing global demand.