In an attempt to address the pressing issue of surging inflation, the Pakistani government, led by caretaker Prime Minister Anwaar ul Haq Kakar, has implemented a bold plan involving substantial fuel price reductions and the initiation of a price-control mechanism.

Pakistan’s economic recovery journey is at a critical juncture, with the nation operating under a caretaker government. This situation emerged after Pakistan narrowly averted a sovereign debt default through a $3 billion loan program approved by the International Monetary Fund in July. However, the bailout came with certain conditions, making it challenging to control inflation.

Prime Minister Kakar conveyed the strategy through a social media post. “In light of the significant reduction in fuel prices, I have instructed federal and provincial authorities to activate a robust price control mechanism,” he announced.

The primary objective is to ensure that the benefits of these price cuts are felt by ordinary citizens, leading to lower commodity prices.

As of Monday, petrol prices have been reduced by a notable 40 Pakistani rupees per litre, bringing the cost down to 283.38 rupees. Similarly, high-speed diesel prices have decreased by 15 rupees per litre, now standing at 303.18 rupees, as per the Ministry of Energy.

According to a press release from the Finance Ministry, the reasons behind this price reduction include the declining trend of international petroleum prices and the strengthening of the Pakistani rupee against the U.S. dollar.

Inflation in Pakistan reached a concerning 31.4% year-on-year in September, up from 27.4% in August, largely driven by the relentless rise in fuel and energy prices.

While the government’s measures have brought about a notable recovery of the Pakistani rupee, experts remain cautious about the long-term effectiveness of these fuel price reductions in curbing inflation. Amreen Soorani, Head Of Research at JS Global Capital, pointed out, “The current reduction in fuel prices primarily reflects international price trends and the rupee’s exchange rate. The sustainability of this cut depends on future developments in these factors.”

She stressed that ongoing efforts to combat illicit trade have contributed significantly to stabilizing the rupee against the dollar. Continuing these measures may help keep the rupee’s trajectory steady. Soorani added, “Pakistan operates as a trade deficit nation with limited sources of dollar inflow in its balance of payments. In the long run, available information suggests that the rupee may continue to depreciate, although ongoing measures may mitigate the extent of depreciation.”

Fahad Rauf, Head of Research at Ismail Iqbal Securities, highlighted a persistent challenge in price movements. “When fuel prices rise, transportation costs and product prices tend to follow suit. However, when prices fall, the impact is not always fully passed on to consumers.”

In a broader global context, analysts are closely monitoring the conflict between the Islamist group Hamas and Israel, identifying it as one of the most significant geopolitical risks to oil markets since Russia’s invasion of Ukraine last year.

Photo: Abdul Hanan

By: Montel Kamau
Serrari Financial Analyst
16th October, 2023