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A huge increase in Pakistan’s fuel import bill from $300 to $800 billion is putting more pressure on the economy.
The most serious fuel price shock to hit Pakistan in more than half a century threatens to unleash a flood of cascading crises that could batter all aspects of the economy and undermine the government of Prime Minister Shehbaz Sharif.
Earlier this week, Sharif said Pakistan’s oil import bill had surged from $300 million before the conflict to $800 million now, which he said erased all the economic progress the country had made over the past two years. Analysts say the knock-on effects will be increasingly severe, impacting everything from agriculture and transport to the price of food and basic goods, worsening the plight of families already facing a cost-of-living crisis.
“Conventional economics tells us that oil price hikes trigger a chain reaction across the economy,” economist Kamran Butt told the Dawn newspaper. “They increase transportation costs, push up the prices of daily-use commodities and food items, raise the overall cost of living, reduce purchasing power, increase poverty and unemployment, slow economic activity and eventually fuel public discontent as quality of life deteriorates.”
The State Bank of Pakistan raised its key policy rate by a full percentage point to 11.5 percent.
The bank said: “The Committee noted that prolonging the Middle East conflict has intensified risks to the macroeconomic outlook. In particular, the global energy prices, freight charges and insurance premiums continue to remain significantly above pre-conflict levels. Furthermore, the supply chain disruptions have contributed to the prevailing uncertainty.”
Soaring fuel costs have a global impact, but Pakistan is particularly vulnerable. It is heavily dependent on imported energy, and higher costs worsen its already precarious balance-of-payments position. Fuel prices feed directly into inflation – diesel powers trucks, buses, tractors, generators and parts of the food supply chain, while petrol affects commuting and consumer transport.
The country is also highly reliant on remittances from workers overseas, mostly labourers working in Gulf states. The war could devastate this income.
All this is impacting an already fragile economy weakened by years of inflation, debt stress and sluggish growth.
The government is caught between two bad options, say analysts – pass on global oil prices to consumers and face public anger, or subsidise fuel and blow a hole in the budget. Pakistan is under strict IMF supervision, which limits the government’s ability to spend its way out of the problem. The government has been widely criticised by analysts for botching negotiations in April when it sought IMF approval for higher fuel subsidies and was rebuffed.
“We are in a state of absolute dependency, where even a $1bn tranche, which is a microscopic amount in global fiscal terms, can make the difference between survival and collapse,” said economist Kaiser Bengali, former adviser for planning and development to the Sindh chief minister.
“The current government’s penchant for ‘austerity theatre’ – selling off official cars or symbolic goats and horses – is a joke that has been played out for 40 years,” he said. “It does nothing to impact the oil market.”
The escalating economic situation is piling more pressure on Sharif’s government. Pakistanis are angry and opposition parties are taking advantage.
“The government’s flawed policies have imposed an economic war on the people,” said Aslam Ghauri of the JUI-F party. By focusing on the burden of rising fuel costs on ordinary people, they are hoping to make the economic emergency a political crisis for Sharif.