Pakistan’s monthly oil import bill has surged from about $300 million before the Middle East conflict to roughly $800 million now, Prime Minister Shehbaz Sharif said. The jump has come as global energy, freight and insurance costs climbed, forcing the State Bank of Pakistan to lift its policy rate to 11.5 percent. Analysts warn the price shock is feeding through transport, food and basic goods costs and could deepen an already fragile balance-of-payments position. The government faces a narrow set of choices under IMF oversight that could shape both the economy and political stability.

Pakistan is confronting a major external shock. The rise in the country’s oil import bill has been steep and sudden. Officials say the bill rose from about $300 million a month to around $800 million since the conflict in the Middle East widened. That change erased gains the government had recorded over the past two years, Prime Minister Shehbaz Sharif said earlier this week.

How the bill jumped

Global energy prices climbed as the conflict pushed up demand, freight charges and insurance premiums. The State Bank of Pakistan said the central bank’s policy committee had noted those factors were substantially above pre-conflict levels. The committee also pointed to supply-chain disruptions that add to uncertainty.

Those international cost rises translate quickly into a larger import bill for Pakistan because the country imports most of its fuel. More expensive oil means more cash leaving the country. That worsens Pakistan’s balance-of-payments position. It reduces the room for other imports and for paying debts.

Economic fallout across daily life

Fuel touches many parts of Pakistan’s economy. Diesel powers trucks, buses, tractors and generators. Petrol affects commuting and other consumer transport. When diesel and petrol get pricier, transport costs rise. Those costs then feed into food prices and the price of other daily-use goods.

Economist Kamran Butt told the Dawn newspaper, "Conventional economics tells us that oil price hikes trigger a chain reaction across the economy. 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."

Higher transport costs also hit agriculture. Tractors and irrigation pumps burn diesel. Fertiliser and other inputs often move long distances by road. When those costs rise, farmers face heavier bills.

That can push up food prices at the retail level.

Pakistan’s economy was already carrying the effects of past inflation, high public debt and slow growth. The new fuel shock stacks on top of those problems. It cuts into household budgets at a time when many families are already under strain.

Mastheads

Policy responses and political pressure

The State Bank raised its key policy rate by a full percentage point to 11.5 percent. The bank framed the move as a response to elevated risks to the macroeconomic outlook from higher global energy costs and supply-chain disruption.

That choice comes with trade-offs. A higher policy rate aims to rein in inflation.

But it also raises borrowing costs for businesses and the government. Higher rates can slow economic activity at a moment when households are feeling squeezed.

The government faces two stark options, according to analysts quoted by local media. It can pass global price increases through to consumers. That would limit fiscal damage but would spark public anger over higher pump prices and living costs. Or it can subsidise fuel to shield households. Subsidies, though, would widen the fiscal deficit and eat into the budget.

Those options are further constrained by Pakistan’s relationship with the International Monetary Fund. The country is under strict IMF oversight, officials said. Islamabad sought IMF approval in April to raise fuel subsidies but was rebuffed. Critics have said the government mishandled those negotiations.

That failed request highlights a political dimension. Subsidies are popular with voters. But they're expensive. Facing a tight budget and IMF conditions, the government has limited scope to use large-scale subsidies without risking its external financing plan.

Remittances and the external cushion

Remittances are a key external source of cash for Pakistan. A sizable share comes from workers in Gulf states. The article notes that the same Middle East conflict that pushed up energy costs could also dent remittances. If remittance flows slow, Pakistan’s foreign-currency cushion would shrink.

Smaller remittances would tighten foreign-exchange reserves. That would make it harder for the central bank and government to defend the currency or pay for essential imports. It would also raise the odds of needing outside financing or of deeper domestic adjustments.

Price shocks this large can reshape politics. Analysts warn the fuel price shock is the most serious Pakistan has faced in over half a century. Rising food and transport costs tend to hit poorer households hardest. That increases the risk of public discontent.

When citizens see falling purchasing power, they often press politicians for relief. The government’s options are limited by fiscal constraints and IMF rules. That narrowness can fuel protests or political backlash if voters judge relief to be not enough.

At the same time, attempts to shield consumers through subsidies can deepen fiscal stress. They can mean bigger budget deficits or cuts to other services. That, in turn, can create new sources of public grievance.

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Prime Minister Shehbaz Sharif said the surge in the oil import bill wiped out two years of economic progress, while the State Bank raised its policy rate to 11.5 percent.

This article was created with AI assistance.