Pakistan is confronting its most serious fuel‑price shock in over half a century, which could trigger a cascade of economic problems and undermine Prime Minister Shehbaz Sharif’s government, a new report has said. 

The report from Aljazeera said soaring global oil costs have hit Pakistan particularly hard because the country is heavily dependent on imported energy and remittances from Gulf states, along with an “already precarious balance-of-payments position.” 

The West Asian conflict could put a big hole in remittances from workers overseas, mostly labourers working in Gulf states.

Earlier this week, Sharif said Pakistan’s oil import bill has nearly tripled to $800 million from $300 million before the conflict, erasing all the economic progress the country had made over the past two years.

The report cited analysts who said the surge in fuel bills will have severe knock-on effects, impacting all segments of economy from agriculture and transport to the price of food and basic goods, worsening the already severe 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, quoted in the report. Butt said the crisis will reduce purchasing power, increase poverty and unemployment, slow economic activity and fuel public discontent against the government.

The State Bank of Pakistan raised its policy rate by one per cent to 11.5 per cent, citing heightened macroeconomic risks. “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,” the bank said.

The report said the government faces a stark choice of either passing higher costs to consumers, or subsidisation of fuel. Increase in fuel subsidy will widen budget deficits — an option constrained by the International Monetary Fund as part of conditions to lend to Pakistan.

“We are in a state of absolute dependency, where even a $1 billion tranche, which is a microscopic amount in global fiscal terms, can make the difference between survival and collapse,” the report cited economist Kaiser Bengali, former adviser for planning and development to the Sindh chief minister.