Iran-US/Israel Conflict Induced Austerity Measures in Pakistan: Savings Accrued, Costs Incurred

Executive Summary: The total savings that could be realized from the austerity measures in Pakistan due to the Iran-US/Israel conflict is estimated to be around USD 482.7 million, which is a consolidated, albeit limited, fiscal effort. Nevertheless, the net effect on national fuel consumption is small, since government operations contribute to 2.05% of total domestic fuel consumption. As a result, the aggregate fuel savings (approximately 12.63%) are relatively small in comparison to the overall national demand, which restricts the macro-level effectiveness. More importantly, there is also opportunity cost of these actions , estimated at USD 1314.7 million, which is mainly caused due to productivity and learning losses. This gives a cost to benefit ratio of approximately 2.7, which means that each dollar saved from austerity measures has the opportunity cost/losses of 2.7 dollars, making the package economically suboptimal in net terms. Although, some of the administrative actions, including fleet limits, work-from-home, and non-essential spending reductions, do play a significant role in savings. However, most of the interventions are short-term in nature, resulting in deferred, not permanent fiscal benefits. Symbolic measures, including salary reductions and forfeitures, are meant to be political signaling mechanism to positively influence behavioral change across the board, rather than a substantive part of fiscal consolidation. The analysis indicates that the measures can be justified as short-term responses to the crisis in a limited policy space, but they do not provide long-term or structurally meaningful economic gains. These measures would not be adequate in the case of a long-lasting conflict or further escalation (e.g., the blockage of the Strait of Hormuz). More detailed demand management approach, especially in the transport sector (MS and HSD consumption) would be needed to realize significant and sustainable savings, in such scenario.