Fuel price surge threatens economic and political crisis in Pakistan

The most severe fuel price shock in Pakistan in over half a century is threatening to trigger a series of cascading crises, affecting every sector of the economy and weakening Prime Minister Shehbaz Sharif's government.

Earlier this week, Sharif announced that Pakistan's oil import bill had surged from $300 million before the Middle East conflict to $800 million now, wiping out all the economic progress the country had made over the past two years. Analysts say the ripple effects will become increasingly serious, impacting everything from agriculture and transport to food and essential goods prices, worsening the plight of families already facing a cost-of-living crisis.

“Standard economics shows us that rising oil prices trigger a chain reaction across the economy,” economist Kamran Butt told Dawn. “It raises transport costs, pushes up prices of daily consumer goods and food, increases the cost of living, reduces purchasing power, exacerbates poverty and unemployment, slows economic activity, and ultimately fuels public discontent as the quality of life declines.”

The State Bank of Pakistan has raised its key policy rate by one percentage point to 11.5%.

The bank stated: “The committee noted that the prolonged Middle East conflict has increased risks to the macroeconomic outlook. In particular, global energy prices, freight rates, and insurance premiums remain significantly higher than in the pre-conflict period. Moreover, supply chain disruptions have contributed to the current instability.”

The fuel price surge has global implications, but Pakistan is particularly vulnerable. The country relies heavily on imported energy, and higher costs worsen an already fragile balance-of-payments position. Fuel prices directly impact inflation—diesel powers trucks, buses, tractors, generators, and parts of the food supply chain, while gasoline affects commuting and consumer transport.

The country also depends heavily on remittances from overseas workers, mostly unskilled laborers in Gulf states. The war could devastate this income stream.

All this is hitting an economy already weakened by years of inflation, debt pressure, and stagnant growth.

The government is caught between two bad options, analysts say—either pass on global oil prices to consumers and face public anger, or subsidize fuel and blow a hole in the budget. Pakistan is under close scrutiny from the IMF, which limits the government's ability to spend its way out of the problem. The government has been widely criticized by analysts for mishandling negotiations in April when it sought IMF approval for higher fuel subsidies and was rejected.

“We are in a state of absolute dependency where even a $1 billion disbursement—a tiny figure in global fiscal terms—can mean the difference between survival and collapse,” said economist Kaiser Bengali, a former planning and development adviser to the Sindh chief minister.

“The current government’s penchant for 'austerity theater'—selling official cars or symbolic goats and horses—is a joke that has been going on for 40 years,” he said. “It does nothing to impact the oil market.”

The escalating economic situation is adding pressure on Sharif's government. Pakistanis are angry, and opposition parties are capitalizing on it.

“The government’s misguided policies have imposed an economic war on the people,” said Aslam Ghauri of the JUI-F party. By focusing on the burden of fuel costs on ordinary citizens, they hope to turn the economic emergency into a political crisis for Sharif.