Islamabad: A new study by the Pakistan Institute of Development Economics (PIDE) has warned that Pakistan remains highly vulnerable to any disruption in the Strait of Hormuz, one of the world's most critical energy chokepoints.
Titled 'Pakistan's Exposure to a Strait of Hormuz Shock: Fuel Pricing, Inflation, and External Vulnerability,' the study highlights that even a mild global oil supply disruption could trigger higher fuel prices, rising inflation, and significant pressure on Pakistan's external sector.
According to the report, nearly 20 percent of the world's petroleum supply-around 20 million barrels per day-passes through the Strait of Hormuz, making it a vital artery for global energy flows. For Pakistan, where over 22 percent of imports consist of energy products, the economic implications of any disruption are substantial.
The study explains that fuel price transmission is more complex than crude oil prices alone. Freight costs, war-risk insurance premiums, exchange rate depreciation, and domestic taxes collectively amplify the final price impact on consumers. As a result, global oil shocks translate into multi-layered domestic inflation.
Using a nonlinear scenario framework, the study outlines three possible outcomes. A mild shock could push inflation to nearly 8.8 percent within six months, while a stress scenario may see inflation cross 10.4 percent. In a severe case, inflation could exceed 12 percent, driven by strong second-round effects, particularly through transport and food prices.
The report further warns that Pakistan's external balance could deteriorate sharply, with monthly petroleum imports rising by up to $384 million and the annual impact exceeding $4.6 billion in severe scenarios. This could create a feedback loop of currency depreciation, higher import costs, and further inflation.
A key finding is the central role of high-speed diesel (HSD), which significantly drives inflation due to its widespread use in transport, agriculture, and supply chains.
The study recommends urgent policy measures, including a transparent fuel pricing mechanism, improved diesel monitoring, stronger coordination among economic institutions, targeted support for essential sectors, and proactive fuel financing strategies. In the long term, it calls for structural reforms to reduce reliance on diesel and enhance energy resilience.
PIDE emphasized that a disruption in the Strait of Hormuz would not remain an external shock but quickly evolve into a domestic macroeconomic crisis, requiring coordinated policy management.