Pakistan’s economy is highly exposed to spillovers from the war in the Middle East as a net oil and gas importer heavily reliant on GCC supplies.
The International Monetary Fund said in its Pakistan country report that 81% of the country’s fuel imports come from the region, leaving it vulnerable to both higher international energy prices and rising regional price premiums over Brent and WTI benchmarks, particularly for refined products.
“In the event of sustained disruptions to the physical availability of fuel imports, impacts on economic activity would likely be even larger than implied by the increase in international prices,” the report said.
The report said immediate exposure to fertilizer trade disruptions appears manageable because Pakistan has remained largely self-sufficient in urea production in recent years. However, a prolonged disruption to DAP supply chains could affect the Kharif planting season in June and July.
Food import prices could also rise if fertilizer trade disruptions persist.
Pakistan receives annual remittances equivalent to about 9% of GDP, with 55% coming from GCC countries. The IMF warned that a significant disruption to GCC economies or the return of migrant workers could weigh on remittance inflows, a major source of financing for consumption and the balance of payments.
The deterioration in global financial conditions has already triggered capital outflows, which could intensify if the crisis continues, the report said. Access to short-term commercial financing, much of which comes from GCC banks, could also be affected if investor sentiment weakens further.
The authorities responded to the crisis by temporarily delaying fuel price increases while developing a targeted subsidy scheme.
After implementing an initial 20% fuel price increase on March 7, the government delayed further increases by providing a temporary subsidy to oil marketing companies at a cost equivalent to 0.1% of GDP. The subsidy package was funded through spending cuts.
The subsidy was withdrawn on April 3, although a temporary PKR 80 per liter reduction in the petroleum development levy on diesel remained in place. This resulted in gasoline and diesel price increases of 18% and 55%, respectively.
The government also shifted to weekly adjustments of gasoline and diesel prices.
At the same time, federal and provincial authorities announced a targeted relief package for vulnerable groups affected by the price increases, including limited transfers for motorcycle owners and small farmers, as well as subsidized public transport in Punjab and Islamabad.
All relief measures are expected to remain budget-neutral.
The government also announced temporary fuel-saving measures, including a four-day workweek for the public sector and mandatory remote work for 50% of public and private sector employees.
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