Pakistans Exposure to a Strait of Hormuz Shock: Fuel Pricing, Inflation, and External Vulnerability

Ahsan ul Haq and Shahzada M. Naeem Nawaz
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Ahsan ul Haq: Pakistan Institute of Development Economics
Shahzada M. Naeem Nawaz: Pakistan Institute of Development Economics

No 2026:2, PIDE-Working Papers from Pakistan Institute of Development Economics

Abstract: This paper investigates how a disturbance in the Strait of Hormuz could impact Pakistan through fuel prices, inflation, and external-sector pressure. Using a nonlinear scenario framework, it models three cases (mild, stress, and severe) by including war-risk premium, exchange-rate effects, separate shocks to motor spirit (petrol) and high-speed diesel, threshold-based indirect CPI impacts, and staggered monthly pass-through. The results indicate that even a mild shock can disrupt Pakistan’s recent disinflation trend. The stress and severe scenarios lead to substantially higher inflation because diesel-driven transportation and food-distribution costs amplify second-round effects. The findings also show that the shock affects more than just pump prices; it raises the petroleum import bill, weakens the current account, and limits policy options. The paper concludes that an effective response involves a coordinated approach (based on transparent pass-through, targeted support for critical logistics, and active external-sector management) rather than broad price controls.

Pages: 28
Date: 2026
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