Oil prices drop – a potential boon for Pakistan's inflation, remittances, and import bill?

As global oil prices continue to fall – partly due to escalating trade tensions between the U.S. and China – Pakistan may finally catch a break. The drop, driven by fears of a global slowdown and weaker demand, could ease inflation and reduce Pakistan’s hefty oil import bill. However, this relief isn’t without its trade-offs.

Oil prices, already down from their 2022 highs, have been under additional pressure from a potential trade war escalation and OPEC’s decision to increase supply. Brent and WTI crude benchmarks have hit multi-year lows, and markets are reacting to China’s retaliatory tariffs, which have raised the risk of a global recession.

Brent crude futures dropped by $1.37, or 2.1%, closing at $64.21 per barrel, while U.S. West Texas Intermediate (WTI) crude futures declined by $1.29, also 2.1%, to finish at $60.70.

Although energy imports remain exempt from tariffs, the broader economic slowdown could still weigh on oil demand.

Meanwhile, the crude oil price also declined, reaching a four-year low mark. The share prices in oil companies listed on the Pakistan Stock Exchange nosedived following the global crude oil prices slide due to concerns that the dip might erode profit margins.

Reduced monthly inflation

Direct oil price impact is never too significant. It is always the second-order impact that increases or decreases inflation. Oil prices directly impact the 6% weighted transport segment of the inflation basket, and a $5 per barrel decline could reduce inflation by 22 basis points.

However, this only reflects the direct impact, with the overall effect – including second-round impacts – likely to be greater.

The transport index already saw a 1.2% decline in March, driven by lower oil prices.

Import bill and current account deficit

Pakistan's petroleum imports account for 30% of its total imports. The country spends 55% of what it earns through its exports to finance these petroleum imports. This makes it a significant driver of the trade deficit and current account deficit.

The share of oil import in fiscal year 2023-24 (FY24) also decreased to 29% from 36% in the previous fiscal year. This reduction is attributed to lower oil prices and reduced volumetric imports due to the economic slowdown.

Realized oil prices were 3% ($3 per barrel) lower for crude oil and 6% ($6 per barrel) lower for petroleum products in FY24 compared to FY23.

In FY24, Pakistan imported 10.4 million tons of petroleum products and 9.1 million tons of crude oil. The average crude prices declined 3.06% to $84.52 per barrel, and petroleum imports also fell 3.9% to $12.1 billion.

If oil prices take a dip of $5 per barrel, the country's current account deficit could see a change of $1 billion. This impact is 9% of the foreign exchange reserves.

According to Nukta research, if the average crude prices remain at $79.2 for FY25 – down $5/bbl from the FY24 level – the petroleum import bill may decline by $900 million. This value is nearly the amount reaffirmed by Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International in a conversation with Nukta.

Lower remittances?

While falling oil prices help reduce Pakistan’s import bill, they could also slow down remittance inflows from oil-rich (Gulf) countries, which are a key source of foreign exchange.

Lower oil prices often mean less revenue for oil-exporting countries like Saudi Arabia, the UAE, and Qatar. Since these economies rely heavily on oil exports, falling prices can lead to:

• Reduced government spending.
• Fewer infrastructure and development projects.
• Slower job creation, especially in construction and services sectors where many Pakistani workers are employed.

If Pakistani workers face job insecurity, they may prioritize saving money over sending it back home. This could result in a short-term dip in remittances.

If oil prices remain low for an extended period, remittances from the Gulf may decline, affecting Pakistan’s foreign exchange reserves and widening the current account deficit.