Pakistan’s energy pricing policy has long prioritized short-term political relief over long-term economic efficiency, a habit that now risks undermining the country’s fragile external balances as global oil markets remain volatile.
The current account, which recorded a modest deficit of $700 million during July-February FY2026 (compared to a $479 million surplus in the same period last year), has shown signs of improvement with a strong $427 million surplus in February 2026 alone.
Yet it stays highly sensitive to oil price swings. Pakistan’s daily oil consumption hovers around 440,000–480,000 barrels, with over 80% still imported despite modest gains in domestic production to around 90,000 barrels per day in 2025. A $10 per barrel rise in global crude prices can inflate the annual petroleum import bill by $1.8–2.0 billion, while recent tensions in West Asia have already pushed monthly oil import costs toward alarming levels.
Artificially suppressing domestic fuel prices only worsens the strain. It encourages wasteful consumption, drains foreign exchange reserves, and widens both fiscal and current account deficits. Aligning prices more closely with international benchmarks would introduce much-needed market discipline. Estimates suggest consumption could moderate by 5–15%, delivering annual foreign exchange savings of $1–1.5 billion. Though this may trigger short-term inflationary pressures on transport and household expenses, the greater danger lies in perpetuating blanket subsidies on imported fuel, which threaten macroeconomic stability.
Pakistan’s own history delivers a clear cautionary tale. In the years leading to 2008, cheap and abundant natural gas was squandered on low-value uses such as CNG vehicles and domestic cooking. CNG stations mushroomed until acute shortages forced a sudden policy U-turn. Entire economic segments faced disruption, and the opportunity to redirect gas toward higher-value applications, fertilizer production or export-oriented industries, was lost forever. The country was left scrambling for expensive imported LNG, further burdening the external account. Mispricing and misallocation of energy resources had created deep structural damage.
The same flawed logic applies to oil today. Subsidizing imported fuel effectively subsidizes consumption that largely benefits higher-income vehicle owners while burdening public finances. A sustainable path demands realistic pricing to discourage excess use, coupled with targeted support redirected toward public transport, electric mobility, and mass transit systems that serve the wider population and cut long-term import dependence.
Electricity presents a contrasting challenge. Pakistan’s power sector carries massive fixed costs, chiefly capacity payments to Independent Power Producers (IPPs). Installed generation capacity stands at approximately 46 GW, yet annual generation reached about 137 TWh in FY2024, with electricity sales even lower at roughly 110 TWh, reflecting chronic underutilization. This spreads fixed costs over fewer units, driving up tariffs and sustaining circular debt, which stood at Rs2.4 trillion in FY2024 before declining to around Rs1.6 trillion by the end of FY2025 amid settlement efforts.
In this context, increasing productive electricity consumption can actually improve system efficiency. Higher utilization spreads fixed costs across more units, lowering the average cost per kilowatt-hour. Targeted incentives for export-oriented industries and agriculture, sectors vital for jobs and GDP, can keep factories operational and irrigation cycles uninterrupted without excessive fiscal strain. Recent years have seen industrial electricity demand dip at times, highlighting the urgency of policies that support value-adding usage rather than suppress it.
This differentiated approach aligns with Pakistan’s growth objectives. Official targets for GDP expansion typically range between 3% and 5.7% in the medium term, making sustained industrial output and agricultural productivity essential. Energy policy must therefore draw a sharp line: penalize low-value, import-heavy consumption while actively encouraging usage that delivers broad economic multipliers.
A balanced strategy would allow oil prices to reflect market realities, with protective measures such as targeted cash transfers or efficiency programmes for vulnerable households, while accelerating investment in public transport and electric vehicles. On the power side, subsidies must remain precise and productivity-focused, helping to optimize existing capacity, contain circular debt, and avoid reigniting fiscal pressures. Recent steps, including large-scale debt settlements and cancellation of surplus expensive projects, offer a promising start but demand continued resolve.
Pakistan’s recurring economic difficulties often trace back to delayed or politically expedient decisions. The pre-2008 natural gas crisis showed how postponing corrections only magnifies the final cost. By realigning energy incentives now, permitting oil prices to signal true scarcity while nurturing productive power demand, the country can fortify its external account, ease fiscal burdens, and lay the groundwork for more resilient and sustainable growth. The opportunity exists, but the window for decisive action is narrowing.
