Pakistan’s decision to increase petrol prices to Rs 458.40 per litre, along with a petroleum levy of Rs 161 per litre, may cause a structural shock to its fragile economy, as per a report by Business Recorder. The report highlights that this hike, mandated by the IMF program, will impact supply chains, raise input costs, squeeze margins, and reduce output. Moreover, the move, aimed at boosting revenue due to missed tax targets, could negatively affect small and medium enterprises and transport-dependent sectors.
The report emphasizes that the significant surge in petrol and high-speed diesel prices, 63% and 75% respectively within a month, will have a systemic impact rather than being incremental. This increase will further elevate Pakistan’s already high logistics costs, diminishing both domestic and export competitiveness. Additionally, the rise in fuel prices is expected to escalate food production expenses, contributing to food inflation, despite the government’s neglect of these risks due to IMF-mandated subsidy limits.
Critics have pointed out that the government’s reliance on fuel taxation as a revenue source, while convenient and broad-based, may backfire as economic activity slows and fuel consumption decreases. This approach could lead to lower revenue collections beyond a certain threshold. The report also questions the IMF’s stabilization strategy and its potential adverse effects on Pakistan’s economy, particularly on the formal sector, if implemented without structural reforms.
The media house warns that Pakistan has experienced negative consequences in the past from fiscal tightening without accompanying structural changes, leading to economic fatigue and political instability. Analysts suggest that the government should prioritize rationalizing expenditures over revenue generation and work on broadening the tax base. They also advocate for comprehensive energy sector reforms that go beyond mere price adjustments to address underlying structural deficiencies.
