Islamabad:A recent study has found that the latest oil price shock, driven by escalating geopolitical tensions in the Gulf region, especially the Israel-US-Iran conflict and disruptions in petroleum supply routes, could significantly weaken the government’s fiscal position and reduce its ability to maintain macroeconomic stability.
The study titled “Managing oil shocks: Pakistan’s fiscal risks and policy choices” was issued here by Pakistan Institute of Development Economics (PIDE). Authored by Dr Nasir Iqbal, Registrar, Prof Shahzada M Naeem Nawaz and Amna Riaz from PIDE, the study warns that rising global oil prices pose a serious threat to Pakistan’s fiscal stability and ongoing consolidation efforts. According to the report, Pakistan’s budgeted federal primary surplus of Rs1,706 billion, equivalent to 1.3 percent of GDP, is highly vulnerable to external oil shocks. Under a moderate shock scenario, where oil prices rise to $100 per barrel, the primary surplus could decline to Rs1,002 billion. In a severe scenario of $120 per barrel, it may fall further to Rs821 billion, while in an extreme case of $144 per barrel, it could shrink to just Rs781 billion. At the same time, the fiscal deficit may widen from the budgeted Rs6,501 billion, or 5 percent of GDP, to as high as Rs7,517 billion, or 5.8 percent of GDP, reflecting a sharp rise in fiscal stress.
The report argues that oil shocks affect Pakistan not only through a larger import bill, but also by intensifying inflation, increasing pressure on the exchange rate, slowing economic activity and weakening confidence across the economy. As an oil-importing country with deep structural dependence on external energy markets, Pakistan remains highly exposed to fluctuations in global crude prices. The study notes that past episodes of elevated oil prices consistently translated into imported inflation, external account pressures, subsidy burdens and deterioration in fiscal buffers. Historical patterns presented in the report show that when Brent crude exceeded $110 per barrel in earlier periods, inflation in Pakistan remained in double digits, while periods of lower oil prices brought temporary macroeconomic relief.
The report stresses that the fiscal consequences of oil shocks go beyond fuel pricing decisions. They also emerge through lower revenue collection, increased energy-sector support requirements, exchange-rate pressures and broader contingent liabilities.
