New Oil Prices Ease Pressure on Pakistan’s Economy

Global oil price decline offers mixed blessings for Pakistan’s economic outlook

Recent drops in global oil prices present a potential silver lining for Pakistan’s struggling economy. As trade tensions between the United States and China intensify and recession fears mount worldwide, oil benchmarks have hit multi-year lows, potentially easing Pakistan’s inflation pressure and reducing its substantial import expenses.

Oil Market Under Pressure

Oil prices, already down considerably from their 2022 peaks, face additional downward pressure from two key factors: escalating global trade conflicts and OPEC’s decision to increase supply. Brent crude futures recently fell 2.1% to $64.21 per barrel, while U.S. West Texas Intermediate (WTI) crude dropped to $60.70, marking a significant decline.

Although energy imports remain exempt from new tariffs, the broader economic slowdown threatens to suppress oil demand globally. This market shift has already impacted Pakistan’s domestic market, with oil company stocks on the Pakistan Stock Exchange experiencing sharp declines amid concerns about potential profit margin erosion.

Potential Benefits for Pakistan’s Economy

Inflation Relief

While oil prices don’t dramatically impact inflation directly, their second-order effects are substantial. Oil directly affects the transport segment of Pakistan’s inflation basket (weighted at 6%), with analysts estimating that a $5 per barrel price decline could reduce inflation by 22 basis points. Transport costs already decreased 1.2% in March, reflecting the beginning of this trend.

Reduced Import Burden

Pakistan’s petroleum imports constitute approximately 30% of all imports, consuming 55% of the country’s export earnings. This represents a significant drain on foreign exchange and drives both trade and current account deficits.

The share of oil imports in fiscal year 2023-24 decreased to 29% from 36% in the previous year, due to both lower prices and reduced import volumes amid economic contraction. During this period:

• Pakistan imported 10.4 million tons of petroleum products and 9.1 million tons of crude oil
• Average crude prices fell 3.06% to $84.52 per barrel
• Petroleum imports decreased 3.9% to $12.1 billion

Economic analysts suggest that a $5 per barrel reduction in oil prices could improve Pakistan’s current account position by approximately $1 billion, equivalent to 9% of the country’s foreign exchange reserves. If average crude prices remain at $79.2 for FY25, the petroleum import bill could decline by an estimated $900 million.

The Remittance Trade-Off

While falling oil prices offer clear benefits for Pakistan’s import expenses, they present a potential downside for remittance inflows from Gulf states, a crucial source of foreign exchange for Pakistan.

Lower oil prices typically mean reduced revenues for oil-exporting nations like Saudi Arabia, UAE, and Qatar, potentially leading to:

• Decreased government spending
• Fewer infrastructure and development projects
• Slower job creation in sectors employing Pakistani workers

Workers facing employment uncertainty in these regions may prioritize savings over sending money home, which could result in declining remittances to Pakistan. If oil prices remain depressed long-term, reduced Gulf remittances could partially offset the positive effects on Pakistan’s foreign exchange position.

As Pakistan navigates these shifting economic dynamics, the net impact of falling oil prices will depend on how significantly remittance reductions counterbalance import savings, a delicate balance that economic policymakers will need to monitor closely in the coming months.