Ex-SBP Chief Says Pakistan Among Top Economies Most at Risk From Iran War

Pakistan is one of the countries most vulnerable to negative economic spillovers from the Iran War, ex-central bank chief Murtazaz Syed wrote on X today.

Murtaza said Pakistan is also one of the countries with the least policy space to cushion its economy from the fallout of the Iran War. The economy always has a crisis when commodity prices spike.

Fuel and food make up more than half the Consumer Price Index (CPI) basket in Pakistan. Also, 45 percent of the import bill is fuel and food ($25 billion). Meanwhile, 44 percent of remittances come to Pakistan from GCC countries ($16 billion).

By historical standards, Pakistan is in its least favorable starting macroeconomic position to absorb a shock.

The ex-SBP chief noted that Pakistan is in its least favorable position in terms of policy space to respond to an external shock.

Globally, as well, Pakistan is one of the countries with the least policy space to absorb an economic shock, he added.

He explained that despite its painful stabilization of nearly 4 years, Pakistan faces yet another massive shock to growth, inflation and the Rupee that it cannot afford economically or socially (and which the International Monetary Fund [IMF] program cannot accommodate).

“Pakistan is facing yet another stagflationary shock,” he stated.

Pakistan’s GDP per capita has been stagnant over the last ten years, a fate shared with Sub-Saharan Africa and conflict zones. Its people can scarcely afford another economic crisis, Syed warned.

Assuming oil remains at $100 for 2026, there are several external pressures Pakistan could still face. Without policy action, food and fuel import bill could rise by 40 percent to $35 billion and remittances drop by a quarter to $27 billion. This would increase external financing needs by $20 billion, more than the country’s depleting forex reserves ($16 billion), he added.

“If this happens, [it] will be a non-linear decline in all macroeconomic variables. To avoid this, [the government] will need to squeeze growth through contractionary fiscal and monetary policies and by allowing the Rupee to act as a shock absorber,” Murtaza further explained.

He estimated that the rupee could depreciate by 10-20 percent while inflation could increase by 6-8 percent. Rating agencies would downgrade their economic profile for Pakistan while local property prices would fall. Meanwhile, GDP growth could decrease by 2-3 percentage points.

Most importantly, there will be no flexibility under the IMF program. The budget will be tightened, interest rates raised, and the Rupee will depreciate.

“But there is a better way. A more optimal response would involve fiscal stimulus and FX intervention – but this cannot be done without increasing fiscal space and $ inflows via debt reprofiling, deferred financing facilities and mobilizing bilateral FX inflows,” Murtaza wrote.

He said Pakistan desperately needs more policy space to be able to respond more optimally to the Iran war shock. He outright suggested to expect much more financing from IMF despite “exceptional access” limits.

The current account profile would need to be controlled; economize fuel consumption, ramp up oil, gas and fertilizer financing facilities from Saudi Arabia, UAE and Qatar; and build forex reserves through additional inflows.

He also advised cutting back on wasteful spending and to seek multilateral debt service relief and debt reprofiling (both domestic and external).

“Most importantly, there is no redemption without a reprofiling of Pakistan’s domestic and external debt. The alternative is too bleak to contemplate,” he warned, adding that the country’s debt is unsustainable and must be reprofiled.

“By pretending debt is sustainable, Pakistan is defaulting on development and risking social instability,” he concluded.