Iran-Israel tensions threaten Pakistan's fragile economic recovery

Business Recorder

4 hours ago

The world is holding its breath as tensions between Iran and Israel reach a boiling point. What began as a shadow war – fought through covert attacks, cyber strikes, and regional proxies – now teeters on the edge of open warfare.
For many, this may seem like another distant Middle Eastern flashpoint. But for Pakistan and other oil-importing, investment-hungry economies, the potential fallout from a full-scale Iran-Israel war could be immediate, destabilising, and enduring.
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The Strait of Hormuz
Iran has long warned that if it is attacked directly, it would retaliate by closing or disrupting the Strait of Hormuz, through which nearly a fifth of the world's oil and one-third of global LNG passes. If war breaks out and the Islamic Revolutionary Guard Corps acts on this threat, the effect would be seismic.
Oil prices could jump to $120–$130 per barrel, if not higher, within days, according to JP Morgan.
Energy markets would convulse, and strategic reserves would be tapped globally. For Pakistan, where nearly 30% of the import bill is fuel, this would mean an instant blowout of the current account deficit, a weakening rupee, and imported inflation feeding into everything from electricity tariffs to grocery prices.
The current war has the power to reorder global energy, unsettle regional politics, and cast a long shadow over Pakistan's fragile economic recovery
A rise in oil prices would also raise transport costs and production expenses for exporters – particularly in textiles and manufacturing – shrinking competitiveness just when the country is trying to climb out of economic stagnation.
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US Involvement: The risk of a regional war
Should Israel launch a significant military operation against Iran's nuclear infrastructure, US involvement is almost guaranteed – if not militarily, then through security and diplomatic cover.
Iran could retaliate through its extensive network of regional allies: Hezbollah in Lebanon, armed groups in Syria and Iraq, and the Houthis in Yemen. In response, Israel may strike across multiple fronts. The Gulf, already skittish, could be drawn into this widening circle of conflict.
This would be a pan-regional war, not a bilateral spat – and global markets would respond accordingly.
For Pakistani businesses and policymakers, this isn't just an oil story – it's about the collapse of confidence.
Equity markets across the region would take a hit, foreign direct investment (FDI) flows into emerging economies would pause, and the risk premium for countries like Pakistan – already contending with political instability and the International Monetary Fund (IMF) obligations – would rise further. That means higher borrowing costs, capital flight, and declining investor appetite for anything deemed 'exposed to the region'.
Trade corridors under threat
Even beyond the Strait, Iran serves as a critical trade conduit to Central Asia and Turkey.
With road and rail links passing through its territory, Pakistan has in recent years viewed Iran as a potential bridge to diversify trade routes. If Iran becomes a war zone or faces renewed and expanded US sanctions, these overland corridors could shut down indefinitely. The Pakistan-Iran-Turkey freight corridor, a pillar of Pakistan's regional trade ambitions, would collapse.
And as regional tensions rise, other initiatives – such as Iran's role in China's Belt and Road – could also stall, indirectly affecting Pakistan's own the China–Pakistan Economic Corridor (CPEC) trajectory.
The perils of regime change
Some voices in Western capitals quietly suggest that an Iran–Israel war could trigger regime change in Tehran. But regime change rarely brings instant democracy or economic liberalism. More often, it brings chaos, uncertainty, and power vacuums.
In Iran's case, a collapsed regime could unleash internal civil strife, embolden separatist movements, and leave critical oil and gas infrastructure vulnerable.
A successor regime – military, clerical, or revolutionary – might be more aggressive, not less. And either way, it would take years to stabilise one of the region's largest energy exporters, further compounding oil market disruption and regional instability.
Implications for Pakistan
Pakistan has always maintained a careful balancing act between Iran, the Gulf Arab states, and the West. A full-scale Iran–Israel war would make that balance nearly impossible to maintain.
Moreover, if the conflict spreads to the Gulf, the implications for Pakistan's diaspora workers in Saudi Arabia, the UAE, and beyond – who send home billions in remittances – could be severe. Even minor disruptions to Gulf economies or airline connectivity would affect the lifeblood of Pakistan's foreign exchange.
The Iran–Israel confrontation is no longer a question of if – but how far it spreads. For Pakistan and many in the Global South, the imperative now is economic preparedness: building energy buffers, accelerating regional trade alternatives, and strengthening diplomatic channels that could help de-escalate tensions.
The current war has the power to reorder global energy, unsettle regional politics, and cast a long shadow over Pakistan's fragile economic recovery.
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