Every time a drone crosses a border in the Middle East, Islamabad panics, reaches for the IMF bailout hotline, and drafts another decree about turning off office air conditioners at 4 PM. The lazy consensus across global news desks is predictable: a US-Iran war spikes global crude, Pakistan imports almost all its petroleum, the import bill explodes, and the country is forced into yet another round of agonizing austerity.
It is a neat, tidy narrative. And it is entirely wrong.
Pakistan does not have an oil price problem. It has an institutional capture and capital allocation disaster disguised as an energy crisis. When analysts wring their hands over a spike in Brent crude, they are looking at the smoke while ignoring the arsonist sitting in the control room. Austerity measures—cutting development spending, choking private sector credit, and hiking fuel taxes until domestic demand flatlines—do not stabilize the economy. They accelerate its decay.
Let us dismantle the fiction piece by piece.
The Import Bill Fallacy
The standard macroeconomic talking point goes like this: Pakistan is bled dry by expensive petroleum imports, so when geopolitical flashpoints inflate oil prices, the current account deficit blows wide open.
Data tells a more inconvenient truth. The country’s primary structural drain is not the barrel of crude sitting in a refinery; it is the grotesque circular debt rotting the domestic energy grid from the inside out. For decades, successive administrations have treated the power sector as a patronage distribution network rather than an economic utility. Capacity payments to independent power producers, locked into archaic US-dollar-indexed contracts regardless of whether a single kilowatt-hour is dispatched, bleed billions of dollars annually.
When fuel prices rise globally, the state panics about the import bill while continuing to honor contracts that pay foreign and domestic power conglomerates for electricity that factories never consume because the grid is too unstable to run them. Slashing fuel imports via blunt-force austerity while leaving the sovereign power purchase agreements untouched is like putting a band-aid on an arterial bleed while continuing to stab yourself in the thigh.
The Mirage of Fiscal Discipline
When the International Monetary Fund arrives in Islamabad with its spreadsheets, local bureaucrats nod gravely and promise to raise petroleum development levies and slap heavy duties on refined products. They call this fiscal discipline.
In reality, it is a lazy tax grab that targets the wrong end of the supply chain. Because the tax net in Pakistan famously fails to capture real estate, agricultural wealth, and retail capital, the state relies almost exclusively on withholding taxes and levies on documented sectors—chiefly fuel, electricity, and formal manufacturing.
Every time the government hikes fuel prices under the banner of austerity, it crushes the transport sector, makes domestic agriculture uncompetitive due to surging diesel costs for tube wells, and drives whatever informal manufacturing remains further underground. You cannot tax your way to prosperity when your tax base consists entirely of captive corporate entities and salaried workers who cannot escape the withholding mechanism.
I have watched mid-sized textile exporters in Faisalabad burn through their working capital reserves in weeks because a sudden fuel price hike coincided with a tripling of grid tariffs. They did not adapt; they closed their doors, laid off thousands of workers, and moved their capital to the UAE. That is not economic stabilization. That is systemic liquidation.
The Geopolitical Red Herring
Blaming a hypothetical US-Iran conflict for Pakistan’s economic paralysis is an excuse for bad governance. Yes, a regional war in the Persian Gulf disrupts supply chains and spikes shipping insurance rates. Yes, liquefied natural gas becomes harder and more expensive to secure as European buyers outbid Asian spot markets.
But a resilient economy absorbs supply shocks through flexible exchange rates, diversified energy mixes, and export-driven foreign exchange earnings. Pakistan has none of those because decades of overvalued currency management and import substitution policies protected uncompetitive domestic cartels at the expense of exporters.
When the Pakistani rupee was artificially propped up for years to maintain political optics, it destroyed export competitiveness. When energy subsidies were handed out to political favorites rather than targeted toward productive sectors, it built a house of cards. A war in the Middle East merely knocks the house down faster.
The Unspoken Solution
If Islamabad actually wanted to break free from the perpetual cycle of boom, bust, bailout, and austerity, it would require political courage that current institutional arrangements make nearly impossible.
First, the government must renegotiate or selectively repudiate sovereign power contracts that demand capacity payments in foreign currency for idle capacity. If a plant is not supplying cheap power to the grid, it should not be paid a single dollar of taxpayer money.
Second, dismantle the archaic agricultural tax exemptions that protect rural feudal elites who sit in parliament and vote against broadening the direct tax base. As long as wealth generated from land goes untaxed while fuel consumed by a truck driver hauling goods across Punjab is squeezed dry, the social contract remains broken.
Third, stop managing fuel prices with administrative panic. Let the market clear, but protect the vulnerable through targeted cash transfers via digital safety nets rather than blanket price controls that bleed state finances.
Instead, we will likely get more late-night press conferences about turning off streetlights, lowering speed limits, and restricting office hours. It is theater for international lenders, designed to tick boxes on a bureaucratic scorecard while the structural engine rusts into dust.
Stop blaming the Middle East for a crisis manufactured in Islamabad.
