According to a survey, the global price of oil poses a threat to the fiscal stability of Pakistan.

Managing Oil Shocks: Pakistan’s Fiscal Risks and Policy Choices is the title of a new policy viewpoint that was recently published by the Pakistan Institute of Development Economics (PIDE). In this viewpoint, the PIDE warns that rising global oil prices represent a severe threat to Pakistan’s efforts to consolidate its government and maintain fiscal stability.

Dr. Nasir Iqbal, Registrar and Professor of Economics at PIDE; Dr. Shahzada M. Naeem Nawaz, Professor of Economics at PIDE; and Amna Riaz, Research Economist at PIDE, are the authors of the research, according to a press statement that was issued on Sunday.

According to the findings of the study, the most recent oil price shock, which was caused by the aggravation of geopolitical tensions in the Gulf region, particularly the conflict between Israel, the United States, and Iran, as well as disruptions in petroleum supply routes, has the potential to significantly weaken the government’s fiscal position and reduce its ability to maintain macroeconomic stability.

Based on the findings of the analysis, Pakistan’s budgeted federal primary surplus, which amounts to Rs. 1,706 billion and is equivalent to 1.3 percent of GDP, is extremely susceptible to the effects of external oil shocks.

A moderate shock scenario, in which the price of a barrel of oil increases to $100, might result in a decrease of the primary surplus to Rs1,002 billion.

In a severe situation where the price of a barrel is $120, it is possible that it may drop even further to Rs. 821 billion, while in an extreme scenario where the price of a barrel is $144, it may decrease to just Rs. 781 billion.

It is possible that the budgeted deficit of Rs 6,501 billion, which is equivalent to 5.0 percent of GDP, might increase to as high as Rs 7,517 billion, which is equivalent to 5.8 percent of GDP. This would be a reflection of a significant increase in the amount of fiscal stress.

Moreover, the research contends that oil shocks have an impact on Pakistan not just by increasing the country’s import bill, but also by escalating inflation, putting more pressure on the exchange rate, decreasing economic activity, and lowering confidence throughout the economy.

Pakistan continues to be extremely vulnerable to shifts in the price of crude oil on the world market since it is a country that imports oil and has a profound structural dependence on energy markets outside of its borders.

According to the findings of the study, previous instances of high oil prices have repeatedly resulted in various adverse effects, including imported inflation, pressures on the external account, burdens on subsidies, and a decline in fiscal buffers.

The paper presents historical patterns that demonstrate that inflation in Pakistan remained in the double digits during periods in which the price of Brent crude above $110 per barrel. On the other hand, periods in which oil prices were lower brought about brief relief for the macroeconomic situation.

It is emphasized by PIDE that the monetary repercussions of oil shocks extend beyond the decisions made on fuel pricing. Additionally, they manifest themselves as a result of decreased tax collection, increasing support requirements for the energy sector, exchange-rate pressures, and greater contingent liabilities.

In view of the fact that petroleum levy collections and subsidy spending have long remained at the center of Pakistan’s fiscal response during times of oil price pressure, the research underscores this importance.

There is, however, a restricted amount of opportunity for discretionary reduction in the petroleum levy because the government is now working under the Extended Fund Facility of the International Monetary Fund and is facing stringent fiscal targets.

Because of this, the federal primary balance is the most crucial indication for determining whether or not Pakistan is able to withstand an external oil shock without jeopardizing its ability to maintain its debt and achieve stability.

PIDE advocates for a policy strategy that is both disciplined and forward-looking. It suggests that the government should maintain the primary balance as the focal point of fiscal management, strengthen tax administration, improve compliance, reduce leakages, accelerate digital monitoring of high-yield sectors, and create fiscal space by reducing current expenditures that are not essential.

At the same time, it underlined the necessity of protecting social protection spending and high-impact development goals, while continuing to invest in infrastructure, productivity, and export-supporting industries. This was done to ensure that the adjustment to the budget would not come at the expense of long-term resilience and growth.

In order to effectively manage moderate, severe, and extreme oil price shocks, it was emphasized that a credible and pre-defined fiscal contingency architecture should be established.