Pakistan's new petroleum price stabilisation fund faces fiscal and IMF hurdles

Pakistan’s newly announced Petroleum Prices Stabilisation Fund (PPSF), unveiled as a mechanism to shield consumers from volatility in international oil prices, faces significant theoretical, fiscal and institutional challenges that could prevent it from achieving its intended purpose, according to a research note by the Prime Institute.

The government has described the PPSF as a tool to protect consumers from fluctuations in global oil prices by creating a financial buffer for domestic fuel pricing.

However, the Prime Institute argued that while the concept appears attractive, the fund, in its current form, is unlikely to function effectively because it lacks a sustainable funding source, an operational framework, and clarity on its compatibility with Pakistan’s commitments under the International Monetary Fund (IMF) programme.

Import-dependent economy lacks windfall revenues

According to the research note, petroleum price stabilisation funds have generally succeeded in commodity-exporting countries that accumulate surplus revenues during periods of high prices and draw on those savings when prices decline.

It cited examples including Chile’s copper stabilisation mechanism, Saudi Arabia’s reserve system and Norway’s sovereign wealth fund, all of which rely on commodity export earnings.

Pakistan, by contrast, is a net importer of petroleum products and does not generate windfall oil revenues.

Instead, it relies on the Petroleum Development Levy (PDL), a surcharge collected from consumers rather than revenue derived from petroleum production.

The institute said financing a stabilisation fund through consumer levies amounts to redistributing costs over time rather than creating a genuine financial buffer against international price shocks.

Fiscal pressures could limit effectiveness

The research note said the PDL has become the federal government’s principal non-divisible revenue source outside the National Finance Commission (NFC) Award and is not subject to parliamentary approval for periodic adjustments.

It noted that the levy has gradually increased from PKR 60 per litre in 2024 to more than PKR 100 per litre on petrol in 2026, with the government targeting PKR 1.68 trillion in PDL collections during fiscal year 2027.

According to the institute, diverting any portion of those proceeds to the PPSF would reduce federal revenues at a time when tax collection targets remain under pressure.

The institute argued that petroleum price stabilisation funds have worked primarily in oil-exporting countries. Chile’s copper stabilisation system, Saudi Arabia’s reserves and Norway’s Government Pension Fund all follow a simple principle: save when commodity export revenues are high and spend when they decline. Pakistan, however, is a net importer of oil and therefore does not generate petroleum windfall revenues that could be saved.

Lack of operational framework

The Prime Institute also highlighted the absence of an operational framework for the new fund.

According to the research note, the notification establishing the PPSF does not specify how the fund will accumulate resources, under what conditions it will disburse money, its liability limits or its governance arrangements.

Instead, the Petroleum Division, the Oil and Gas Regulatory Authority (OGRA) and the Finance Division have been tasked with developing implementation modalities.

The institute cautioned that stabilisation funds without predetermined operating rules risk becoming instruments for politically driven fuel pricing decisions rather than genuine price-smoothing mechanisms. It cited the Philippines’ Oil Price Stabilisation Fund as an example, noting that the scheme was eventually abolished after generating recurring fiscal deficits.

IMF compatibility raises questions

The research note also questioned whether the proposed fund aligns with Pakistan’s commitments under its IMF-supported reform programme.

It said the IMF’s latest country review describes broad-based fuel subsidies as fiscally unsustainable and recommends that any relief measures be targeted, temporary, limited and budget-neutral.

According to the institute, a permanent mechanism designed to absorb fuel price increases for all consumers would require the government to clarify how the PPSF complies with those commitments.

Fund still lacks financial backing

The Prime Institute concluded that the PPSF currently exists only as a notified accounting head without capital, operational rules or a clearly defined funding mechanism.

Until the government explains how the fund will be financed, managed and operated, the institute said the initiative remains more of a policy announcement than a fully developed stabilisation mechanism.