Seven days after the United States/Israel attacked Iran the extremely unpopular decision of a significant rise in the price of petrol and products was announced – 55 rupees per litre for petrol and high speed diesel – while on the tenth day a wide-ranging austerity package, to be applicable for two months, was announced by the Prime Minister.
The question is which Pakistani sector will bear the brunt of the cost of the Middle East crisis – government or the general public?
The rise in domestic petrol price is more than a pass-through of a rise in the international price as the fuel price notified by the government constitutes petroleum levy, a sales tax. In recent years the federal government increased its reliance on the levy as a revenue source – a reliance that required placing it under Other Taxes that are not shared with the provinces under divisible pool taxes. This was notable after the 2010 National Finance Commission (NFC) award which raised provincial allocation from the divisible pool to 56 percent (constituting income tax, sales tax, capital value tax, federal excise and customs duties).
For 2025-26 total budgeted collections under the levy are 1,468,395 million rupees against the budgeted amount last year of 1,281,000 million rupees, an envisaged rise of 15 percent, but a 26 percent rise against the revised estimates of last year of 1,161,000 million rupees.
As per the 7 March notification, petroleum levy was raised from 84.40 rupee per litre (effective 1 March 2026 – a day after Middle East hostilities began) to 105.37 rupees per litre or a difference of 20.97 rupees per litre – a 25 percent rise.
The maximum depot price was notified as 266.17 rupees per litre on 1 March and 321.17 rupees per litre on 7 March – accounting for the levy constituting 31 percent of the maximum depot price on 1 March while the 7 March upgrade in levy accounted for 32 percent of the maximum depot price.
Actual fuel sales data for the first seven months of the current year indicates a 5 percent rise year-on-year. In January 2026 alone fuel sales were estimated at 1.52 million tonnes, up 10 percent year-on-year and 12 percent higher month on month due to a decline in price.
Projecting sales after the recent rise in fuel price would be a challenge given that a rise in fuel price today will erode the value of each rupee earned as a householder struggles to prioritise his limited income.
An extremely conservative fuel sale projection for March of one million tonnes (or a decline of around 34 percent from the January figure) would still net an additional 20.9 billion rupees for the Treasury given the rise of 20.97 rupee per litre levy on 7 March.
In its second review documents dated December 2025 the International Monetary Fund (IMF) projected a shortfall of 157 billion rupees in levy collections noting that the total collected would depend on the GDP growth rate while the Federal Board of Revenue (FBR) recently acknowledged a 430 billion-rupee shortfall in collections July-February 2026 against the target agreed with the Fund. It is therefore fair to argue that the decision to raise the levy on 7 March was agreed with the Fund during the third review under the Extended Fund Facility (EFF) and the second review under the Resilience and Sustainability Facility (RSF) in Karachi and Islamabad, as well as virtually, (25 February to 11 March), which ended inconclusively.
The press release issued by the Fund on 11 March 2026, ended on the note “particular attention was paid to deepening structural reforms, given the authorities’ emphasis on accelerating growth,” (no doubt a reference to the incentive package for industry announced end January by the Prime Minister which was not agreed earlier), adding that there was “considerable progress on the discussions on policies ahead, including sustaining the fiscal consolidation to strengthen public finances.”
Be that as it may, GDP growth rate is without doubt going to be negatively impacted globally, and Pakistan will not be an exception, with the Deputy Managing Director of the IMF stating early March that the ongoing conflict poses significant risks to the global economy particularly energy prices, inflation and regional infrastructure.
The Prime Minister’s austerity package is envisaged to be applicable on all ministries, departments, autonomous bodies, defence organisations, the judiciary and parliament for two months and comprises of the following decisions: (i) 50 percent of government employees are to work from home on a rotating basis with a suggestion that the private sector follow suit though key sectors notably banking have been given an exemption. Factories and agriculture, output producing sectors, would probably also be exempt. Schools/universities would remain closed; (ii) 60 percent of all vehicles at both federal and provincial level are to be grounded with operational vehicles (government buses, ambulances and motorcycles) exempt and the remaining would face a 50 percent slash in their fuel allocation. Provinces are to follow suit; (iii) cabinet members and special assistants would give up salaries for two months while members of the national and provincial assemblies would see a cut of 20 percent in their salaries and allowances. In this context it is relevant to note that effective 1 January 2025 all members of parliament were given a very hefty pay rise – from 180,000-200,000 to 519,000 per month – with federal ministers’ salaries aligned with the new rate which was inexplicable given the economy’s fragility and the harsh upfront IMF conditions. Grade 20 and above would forego two days’ salary; (iii) foreign travel by government officials banned unless in the national interest; (iv) all government entities must enforce simplicity, austerity and energy saving practices – a vague exhortation made in the past and not implemented. Wedding guests would be limited to a maximum of 200 and only one dish served; and (iv) 20 percent cut in development expenditure in the fourth quarter across all federal and provincial departments with savings of 22 billion rupees at the federal level – an outlay which at least theoretically supports infrastructure improvements for the general public. In this context it is relevant to note that the government had authorised July-February 558.12 billion rupees while actual disbursement was only 361.27 billion rupees. In other words, this item had already been cut massively from what was budgeted during the first two quarters and was slated for a further cut in any case.
The savings from these austerity measures were not projected, though for one of the items (i) to (iv) a 4.5 billion rupee saving was noted. This is perhaps indicative of, at best, the expectation that strict enforcement may generate a substantial amount (given the daily envisaged monitoring to be undertaken by a committee under the chairmanship of Ishaq Dar) or, at worst, lack of necessary homework that requires itemisation of the exact savings of each specific component of the package.
To conclude, if one looks at the price to be paid for by the general public it is going to be a lot higher than that to be paid by the three pillars of government at federal and provincial levels: the executive, the legislature and the judiciary. That sadly appears to also be the case in terms of the agreed IMF conditions.
The government must consider slashing its current expenditure to make good on its pledges for austerity.
Copyright Business Recorder, 2026
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