Pakistan’s fragile economic recovery faces a renewed challenge as rising global oil prices threaten to derail fiscal consolidation efforts. According to a new policy viewpoint released by the Pakistan Institute of Development Economics (PIDE), escalating geopolitical tensions in the Gulf region—particularly involving Israel, the United States, and Iran—along with disruptions in key petroleum supply routes, could significantly strain Pakistan’s economic stability in the months ahead.
The study underscores that Pakistan, as a heavily oil-dependent economy, remains acutely vulnerable to fluctuations in international crude prices. It warns that the latest surge in oil prices could weaken the government’s fiscal position, increase macroeconomic pressures, and complicate efforts to maintain financial discipline under ongoing international commitments.
At the center of the analysis is Pakistan’s projected federal primary surplus, which currently stands at Rs1,706 billion, or 1.3 percent of GDP. This surplus, considered a key indicator of fiscal health, appears highly susceptible to external shocks. According to PIDE’s projections, even a moderate increase in oil prices to $100 per barrel could reduce the surplus to Rs1,002 billion. In a more severe scenario, where prices rise to $120 per barrel, the surplus may shrink further to Rs821 billion. In an extreme case of oil reaching $144 per barrel, the surplus could decline to just Rs781 billion, significantly undermining fiscal stability.
Simultaneously, the fiscal deficit is expected to widen sharply under these scenarios. From a budgeted Rs6,501 billion—equivalent to 5.0 percent of GDP—the deficit could increase to Rs7,517 billion, or 5.8 percent of GDP, reflecting heightened fiscal stress. Such deterioration would not only complicate debt management but also put additional pressure on already constrained public finances.
The report explains that the impact of rising oil prices extends far beyond an increased import bill. Higher oil costs tend to trigger a chain reaction across the economy, fueling inflation, weakening the exchange rate, slowing economic growth, and eroding overall business and consumer confidence. For Pakistan, which relies heavily on imported energy, these effects are particularly pronounced.
Historical evidence presented in the study reinforces this concern. Periods when Brent crude prices exceeded $110 per barrel have consistently been associated with double-digit inflation in Pakistan. Conversely, phases of lower oil prices have offered temporary relief, allowing for improved macroeconomic indicators. However, such relief has often been short-lived, given the country’s structural dependence on external energy sources.
The report also highlights the broader fiscal implications of oil price shocks. These include reduced revenue collection due to slower economic activity, increased spending on energy subsidies, and mounting pressures on the exchange rate. Additionally, contingent liabilities—such as those linked to the energy sector—tend to rise during periods of high oil prices, further straining government resources.
A key concern identified by the report is the limited policy space available to the government in responding to such shocks. With Pakistan currently operating under the International Monetary Fund’s Extended Fund Facility (EFF), fiscal targets are tightly constrained. In particular, the scope for adjusting petroleum levies—a critical revenue source—remains restricted. As a result, policymakers have fewer options to cushion the impact of rising oil prices without compromising fiscal discipline.
Given these constraints, the report emphasizes the importance of maintaining a strong primary balance. This metric, which excludes interest payments from government expenditures, serves as a crucial benchmark for assessing fiscal sustainability. A weakening primary balance could signal growing risks to debt stability and undermine investor confidence. The scenario-based analysis for the fiscal year 2026 paints a challenging picture. Even under moderate oil price increases, Pakistan’s fiscal position is expected to deteriorate due to existing weaknesses, including shortfalls in revenue collection by the Federal Board of Revenue (FBR). In more severe scenarios, the combined effects of rising inflation, slowing growth, and declining fiscal buffers could create significant macroeconomic instability.
While higher inflation may lead to some nominal gains in government revenues, the report notes that these are unlikely to offset the broader economic costs. Increased import bills, higher subsidy requirements, and reduced economic activity are expected to outweigh any temporary revenue benefits, leaving the overall fiscal position weaker.
In response to these challenges, the report calls for a comprehensive and forward-looking policy approach. The report recommends that the government place the primary balance at the core of fiscal management, ensuring that all policy decisions are aligned with maintaining fiscal discipline. Strengthening tax administration and improving compliance are also identified as critical priorities, particularly in broadening the tax base and reducing reliance on a narrow pool of taxpayers.
The study suggests leveraging digital tools to enhance monitoring and enforcement in high-revenue sectors. By reducing leakages and improving transparency, the government can generate additional fiscal space without imposing excessive burdens on the economy. At the same time, it stresses the need to curtail non-essential expenditures, particularly those that do not contribute to long-term growth.
Importantly, the report cautions against indiscriminate austerity measures. While fiscal consolidation is necessary, it should not come at the expense of social protection programs or key development initiatives. Investments in infrastructure, productivity, and export-oriented sectors must be preserved to ensure sustainable economic growth and resilience.
The report’s central message is clear: oil price volatility is not a temporary phenomenon but a recurring structural challenge for Pakistan. In an increasingly uncertain global environment, reactive and ad hoc policy measures are no longer sufficient. Instead, the country must adopt a proactive and institutionalized approach to managing fiscal risks. To this end, it advocates the development of a formal fiscal contingency framework. Such a framework would enable policymakers to respond effectively to varying degrees of oil price shocks—whether moderate, severe, or extreme—without undermining overall economic stability. By setting predefined policy responses, the government can reduce uncertainty and enhance its ability to navigate external shocks.
In conclusion, the report serves as both a warning and a roadmap for policymakers. Rising oil prices, driven by geopolitical tensions and supply disruptions, pose a significant threat to Pakistan’s fiscal health. Without strategic planning and disciplined policy implementation, these challenges could reverse recent stabilization gains and push the economy back into a cycle of instability. The need for decisive and forward-looking action has never been more urgent.