EDITORIAL: One silver lining for Pakistan’s economy as it transitions from stabilisation to modest growth without triggering an external account crisis is the bearish outlook on international oil prices. Brent is currently hovering around US$ 60 per barrel, and many global analysts expect it to fall into the US$ 50s in the coming months.
If oil remains below US$ 60, Pakistan could have enough breathing room to grow beyond 4 percent without sparking a balance of payments crisis. Crude oil and its products (petroleum) are the single largest component of Pakistan’s imports. A US$ 10 per barrel drop in oil prices translates into approximately US$ 2 billion in savings on crude oil, petroleum products, and RLNG.
Last year, petroleum imports amounted to US$ 15.9 billion (Pakistan Bureau of Statistics data) when average prices were US$ 74.5 per barrel. If oil prices average US$ 60 in FY26, the petroleum import bill could fall by around US$ 3 billion, creating fiscal space for non-oil imports to rise without causing market panic.
It is important to note that non-oil imports are already climbing at around 3 percent, which has raised concerns among policymakers as the current account has slipped back into deficit in the first quarter after a surplus last year. This has prompted the SBP to keep monetary policy tight to contain demand and ensure currency market stability by maintaining adequate dollar supply.
The SBP has already reduced its purchases from the interbank market to smooth import payments. At the same time, it must continue building reserves, which is critical to sustaining growth momentum. Lower oil prices could provide the needed boost and room for a broad-based recovery. If oil stays below US$ 60 for a sustained period, the SBP could consider further reducing the policy rate—currently at 11 percent—which could fall into single digits during the fiscal year.
Beyond the external and monetary implications, lower oil prices would also support fiscal consolidation and help the SBP keep inflation within its medium-term target of 5 to 7 percent. Lower prices would allow the government to raise petroleum levies (and possibly GST) without raising end-user prices to possibly meet primary fiscal surplus targets despite expected shortfalls in FBR tax revenues. Even with higher taxes, the government could still reduce retail fuel prices, which would ease inflationary pressures.
The impact would extend to electricity tariffs as well. RLNG, coal, and other hydrocarbons are intricately linked to oil prices. Lower oil means a negative Fuel Price Surcharge (FPS), effectively reducing grid tariffs. This would be a significant relief for the manufacturing sector where high power costs have been constituting a major impediment to efforts aimed at achieving greater competitiveness and margins.
The key question is for how long oil prices are likely to stay low. Several global dynamics point in that direction. Demand is softening due to the impact of Trump’s tariffs and the rising share of renewables as solar and battery costs plunge. A substantial portion of oil is used in shipping; lower global trade volumes mean lower oil demand.
At the same time, oil-producing countries are increasing supply, and the recent peace accord in the Middle East supports expectations of sustained higher output. China’s current stockpiling of oil is temporarily supporting demand. Once this phase ends and its buying normalizes, oil prices could decline further.
Pakistani policymakers are watching this closely. The incumbent PML-N government, in particular, fondly recalls its “golden period” of FY15–17, when oil prices averaged in the US$ 40s and US$ 50s, allowing for low interest rates and faster growth. But this time, it must avoid repeating past mistakes—especially the buildup of a large current account deficit. Rather than chasing 6 percent growth too quickly, the government should use this opportunity to push long-delayed structural reforms, especially in the energy sector, to achieve sustained, high-quality growth with or without an oil windfall.
Copyright Business Recorder, 2025