Explained: Why Are Petrol, Diesel Prices in Pakistan at an All-Time High?

Pakistan could face an acute crunch in fuel supplies in February as banks stop financing payments for imports.

The announcement came after the country's currency plummeted to its lowest (Rs 255.43 against the US dollar) last week.

(Photo: iStock)

Amid an escalating economic crisis, Pakistan increased petrol and diesel prices by Rs 35 per litre.

"We have decided to increase the price of petrol and diesel by Rs 35. The price of kerosene oil and light diesel oil has been increased by Rs 18," the country's Finance Minister Ishaq Dar said, adding that the new prices would come into effect from 11 am on Tuesday, 31 January.

The announcement came after the country's currency plummeted to its lowest (Rs 255.43 against the US dollar) last week.

But why did Pakistan increase fuel prices? Why did the country's currency plummet? The Quint explains.

Why Did Pakistan Increase Fuel Prices?

"The Pakistani rupee saw devaluation last week... and now we are seeing an 11 percent increase in the prices of petroleum products in the international market,” Dar said in a televised address.

He informed that the price rise is being done on the recommendation of the Oil and Gas Regulatory Authority, which said that there were reports of artificial shortages and hoarding of fuel in anticipation of a price hike.

Despite international prices and the rupee devaluation, "on directions of Prime Minister Shehbaz Sharif, we have decided to increase the minimum price of these four products (high speed diesel, kerosene oil, MS petrol, light diesel oil)," Dar said, according to a report in Dawn.

Dar added that over the last four months, there was no increase in petrol prices. He further said that instead petrol and diesel prices decreased by Rs 19 or Rs 20 during this period – and that the prices of kerosene oil and light diesel oil dropped by Rs 29 and Rs 30, respectively.

According to Dar, rumours of an increase in the cost of gasoline and diesel prices by Rs 50 led to an artificial shortage in the market.

Why Is the Price Hike a Cause for Concern?

A report in Dawn noted how Pakistan could face a crunch in fuel supplies in February as banks have stopped financing and facilitating payments for imports due to depleting foreign exchange reserves (the country has just $3.7 billion left in foreign exchange reserves).

The report noted that Pakistan typically meets more than a third of its annual power demand by utilising imported natural gas, the prices for which went up following Russia’s invasion of Ukraine in February last year.

“There is no shortage this fortnight. If we don’t have LCs (letters of credit) open right now, we might see shortages in the next fortnight,” a senior official at one of the oil companies told Reuters.

A letter of credit issued by the importer’s banks is a standard form of payment guarantee in the oil trade to the exporter.

Dawn stated that oil traders, however, are not opting for nations such as Pakistan and Sri Lanka due to a severe shortfall of foreign exchange.

But why are letters of credit not being issued? State Bank of Pakistan officials cited “severe liquidity issues” faced by the country for delays in the opening of LCs.

A Domino Effect

Pakistan Business Council CEO Ehsan Malik pointed out to The Tribune that the hike in petrol prices would increase the cost of transportation for everyone.

"This will negatively impact supply chain management of goods and people, leave multiplier impact on the economy…inflation will go up significantly," Malik said.

The cash-strapped nation is seeking to unlock a bailout from the International Monetary Fund (IMF).

From 31 January to 9 February, an IMF team will visit Islamabad to consult with government representatives about the implementation of the criteria that are linked to the aid package. Some of the measures to meet the IMF conditions include increasing fuel and energy prices and hiking taxes.

In June last year, Pakistan hiked the prices of all petroleum products by about Rs 14 to Rs 19 per litre to meet the pre-conditions set by the IMF.

Rising Inflation

The rise in fuel prices has been accompanied by a skyrocketing hike in prices of basic as well as imported goods.

The food inflation rate has almost tripled. According to the Pakistan Bureau of Statistics, it was 11.7 percent in December 2021 and 32.7 per cent in December 2022

A World Bank report has revealed that an alarming 6 million people in Pakistan are currently experiencing acute food insecurity. But what is worse is that the number may go up to 8.5 million between September and December this year, the report added.

Meanwhile, hospitals in the country are running out of medicines. According to the State Bank of Pakistan, the country is facing a 28 percent inflation rate.

Last week, large parts of Pakistan witnessed a huge power outage, even as electricity bills have almost doubled over the last year and a half.

Experts have warned that if the country is not bailed out soon, Islamabad could go bankrupt.