by Irtija AHMAD
As the US-Iran confrontation lingers, Asia has less instruments to cushion the blow and economies elsewhere in the Global South have begun to feel the pain. It is in moments such as these that multilateral institutions become crucially important. The challenge for institutions like the IMF is whether their programs should have shock provisions for import-dependent countries, so that a war-driven price increase is not seen as domestic budgetary indiscipline, as developing nations brace for the impact of a conflict they did not cause.
Pakistan has seen fuel prices rising for months following the closing of the Strait of Hormuz, and now risks a further jump in petrol prices to meet demands of the IMF. When fuel prices hit record highs in April following the US-Israeli attacks on Iran, the IMF was reluctant to consider any flexibility in the petroleum levy. To ease the pain, the government offered about RS 129 billion in relief, financed through cuts to development investment and other expenditure. In June, the Petroleum division had warned that excessive taxes could pose a risk to social and economic stability and advocated restricting the levy collection aim at Rs 1 trillion and lowering the rate to Rs. 50 per litre. Pakistan began revising fuel prices daily in July and the petroleum minister said a dynamic pricing grid being considered will reduce the charge when world prices soar sharply. The petrol currently costs Rs. 391.30 per litre against an underlying cost of Rs. 254.96. More recently the Prime Minister declared in New York that the IMF had no issue to a targeted rs. 100 per litre subsidy on petrol. The stress doesn’t remain economic, it spills over into food security and public protest.
Bangladesh is under a similar pressure. It is facing the most significant power crisis since the administration of Tarique Rehman took office in February 2026 and on September 5 a Jamaat-e-Islami led 11-party alliance started a protracted march across it. IMF concerns about the energy subsidy burden under the country’s $5.5 billion loan facility add to the political strain. Its annual fossil fuel import cost might surge $2.8 billion in 2026, a 30 per cent increase on 2025.
Unlike struggling economies, the IMF has tools. Its programs do allow for exceptions when targets are missed, but these are granted on a case-by-case basis, after the event. But there is no pre-agreed plan for a conflict that has pushed petrol above Rs 390 a litre, and Pakistan needs a formal waiver to miss its end-June 20265 BISP expenditure level by just Rs 463 million. The end effect is inconsistency. The Fund denied flexibility on its petroleum levy in April, while Sri Lanka obtained a brief relaxation of its bailout requirements that month.
Uncertainty is not a reason to wait either. On September 18, JP Morgan’s oil research team reported that for the first time since the conflict started it did not have a baseline projection, and did not know how to model the endgame. If one of the world’s biggest banks cannot see where prices are going, borrowing governments cannot be expected to budget as if they could.
The Fund has acknowledged war-driven shocks before. The Russia-Ukraine war 2022 also caused a global food crisis, which led to the opening of a Food Shock Window that allowed impacted countries to borrow up to an additional 50 per cent of their quota using its emergency loan instruments. The Food Shock Window is still active until March 2024. The window brought finance but not relaxed conditions, but it did establish a principle: An external shock is not a policy failure. There is no counterpart for this year’s energy shock.
A shock clause would make that principle a norm. It might be activated when benchmark oil prices stay over an agreed threshold for a certain length of time, temporarily modifying levy and fiscal targets for import-dependent debtors. And we would ringfence development spending, so that relief is not compensated for by eliminating the investment that develops long-term resilience. The provision would sunset automatically once prices returned to normal, and any aid it provided would have to be targeted and publicly acknowledged.
The IMF is right to be cautious. One of the more reliable sources of revenue for Pakistan is the petroleum levy, and better-off households have historically benefited the most from blanket fuel subsidies. Kristaline Georgieva, managing Director of the IMF, has advised nations to keep support targeted and temporary. It is less a question of disagreeing on design and more on fiscal space, and a shock clause is a way in which that space might be crated without compromising discipline.
The IMF will also have to pay the price for its rigidity. In Bangladesh, power shortages have already sent the opposition onto the streets. Programs that do not care whether the shocks are coming from inside or outside risk turning economic suffering into resistance to reform itself. A more discerning IMF, one that can distinguish indiscipline from misfortune, would be fairer and also more effective.
