Ease Prices Or Obey IMF? Why Iran War Oil Shock Has Left Pakistan In A Bind

Last Updated:March 13, 2026, 13:03 IST

Pakistan is navigating a dilemma between fulfilling strict fiscal requirements of its $7-billion IMF programme and protecting citizens from record-breaking inflation during Ramadan

The shutting of the Strait of Hormuz, the maritime chokepoint which carries roughly one-fifth of the world’s oil supply, amid the US-Israel-Iran war has put Pakistan in what analysts call an “oil dilemma".

What is Pakistan’s oil dilemma? What has Islamabad done to handle it? News18 explains

PAKISTAN’s OIL DILEMMA: IMF OR CONSUMERS

The Pakistani government is caught between two core issues:

Fiscal Liability: Keeping domestic fuel prices artificially low to protect consumers which would create a massive circular debt and fiscal deficits.

Economic Shock: Allowing international prices to pass through directly which could in turn trigger rapid inflation, as petrol and diesel prices have already jumped by 20% in early March, which would help it meet the Monetary Fund (IMF) criteria.

Simply put, Pakistan is navigating a dilemma between fulfilling the strict fiscal requirements of its $7-billion IMF programme and protecting its citizens from record-breaking inflation during the month of Ramadan.

What is the IMF condition for Pakistan?

The Monetary Fund (IMF) has maintained a firm stance that Pakistan must adhere to market-driven pricing to ensure long-term fiscal stability. The IMF has reportedly urged the government to avoid providing any subsidies on petroleum products.

During virtual negotiations, the IMF demanded that domestic petrol and diesel prices be increased immediately to match surging global rates caused by the Middle East conflict. In terms of Petroleum Development Levy (PDL), the government is under pressure to meet a strict Rs1,468 billion levy collection target by June 30, 2026, to satisfy IMF fiscal discipline benchmarks.

The consumer pressure amid Ramazan

Experts warn that skyrocketing fuel prices, which jumped 20% (Rs 55 per litre) on March 7, could push headline inflation to 15-17%. The price of essential food items has spiked due to rising transport and logistics costs, causing widespread public despair during a month of fasting.

The Pakistan Business Forum (PBF) has urged the government to use its Rs390 billion contingency fund to lower prices and prevent a total industrial shutdown.

PAKISTAN TAKES THE MIDDLE PATH

Caught between these two forces, Pakistan’s Prime Minister Shehbaz Sharif’s government has adopted a middle-path strategy.

Pakistan has formally approached the IMF to seek a temporary reduction or “relief" on the petroleum levy to cushion the impact of $120-per-barrel oil.

Instead of direct subsidies (which the IMF forbids), the government is using administrative cuts to reduce fuel demand, such as implementing a four-day workweek; closing schools and universities for two weeks; cutting government fuel allowances by 50%.

APPEASING IMF: PAKISTAN CHANGES ITS OIL PRICING MECHANISM

Pakistan has shifted its oil pricing mechanism from a fortnightly (15-day) review to a weekly adjustment system. Retail prices for petrol and high-speed diesel (HSD) are now reviewed every Sunday (with effects from Monday) or as needed on a weekly basis, rather than every two weeks.

The government now uses a five-day average price (Monday to Friday) based on the Gulf Arab Platts assessment for each product. The pricing incorporates the weighted average premium of Pakistan State Oil (PSO) cargoes that have been discharged or are available for sale in the coming week. To absorb some of the shock, the government has begun dynamically adjusting the Petroleum Levy (PL). For instance, in early March 2026, the levy on diesel was reduced by Rs 21.21 per litre to partially offset a massive Rs80 international price hike, resulting in a net domestic increase of Rs 55, Dawn reported.

The new system aims to reduce the “lag" between international benchmark movements and domestic retail rates, ensuring that both surges and declines in global prices are reflected more quickly at the pump, according to reports.

Surging towards a more market-driven, frequent adjustment mechanism is a key requirement in Pakistan’s ongoing consultations with the Monetary Fund (IMF) to stabilise national energy finances.

HOW THE CHANGE IMPACTED PAKISTAN

Following the first major weekly adjustment on March 7, 2026, prices reached record highs:

Petrol (MS): Increased by Rs 55 to Rs 321.17 per litre.

High-Speed Diesel (HSD): Increased by Rs 55 to Rs 335.86 per litre

The oil prices are bound to affect the transportation, food and other essentials, thus testing Pakistan’s economic resilience, say experts.

Former finance minister Miftah Ismail argued that the move has effectively transferred roughly Rs19bn from struggling consumers to oil companies. This, he said, reflected either serious policy misjudgment or undue influence by the oil lobby, according to a Dawn report. “The oil companies had already bought the petrol and diesel being sold now before Feb 28 at lower prices. And their costs plus profits were already being covered by the prices set originally for March 1 to 15. There was absolutely no reason to increase their prices and allow them excessive profits. This is just taking advantage of a crisis and allowing them excessive profits. If the government wanted to move to a seven-day pricing cycle, it should have done so at the end of the existing fortnightly pricing period," he said.

LOCALS FEEL THE HEAT DURING RAMADAN

Experts from the Petroleum Division and The Express Tribune noted that the change aims to “bail out" the oil industry from astronomical increases in insurance premiums (surging from $30,000 to $400,000 per ship) and freight costs.

Economists, however, argued that the fortnightly system created dangerous “fiscal bulges" where oil marketing companies (OMCs) were losing Rs 45-50 per litre of diesel in a single week. The weekly shift ensures these “true costs" are recovered continuously.

The change, particularly during Ramazan, has led to anger and panic. Citizens reported to Dawn that the “historically large" Rs 55 hike felt like a “merciless" blow, causing vegetable and fruit prices to jump within hours of the announcement.

Major cities like Karachi, Lahore, and Islamabad saw hundreds of people forming long queues at petrol stations to fill tanks before prices rose further, driven by fears of total shortages.

Daily-wage earners and gig workers (such as bike riders) have expressed that “life itself is beginning to bite," as commuting costs now consume a disproportionate share of their income. Transporters have stated that fare hikes are now “unavoidable," which experts warn will trigger a “second wave" of inflation across all essential goods.

With Senator Saleem Mandviwalla warning that prices could potentially hit Rs500 per litre if the Strait of Hormuz remains blocked, the prevailing mood is one of deep uncertainty and “stagflation" fears, reported Dawn.

WORST NOT OVER YET FOR PAKISTAN?

Pakistan meets around 70 per cent of its diesel requirements through local refineries, importing the remaining 30 per cent. In the case of petrol, the situation is the reverse, with a larger share being met through imports. Diesel supplies to Pakistan have already been affected. PSO is currently struggling to procure diesel, while the premium for supplies has shot up to nearly 50pc of the barrel rate. This implies the government may have to raise the domestic petrol and diesel price when it reprices these products on Saturday, experts told Dawn.

Pakistan’s strategic challenges

Pakistan holds only about 28 days of fuel reserves, leaving little buffer for prolonged disruptions, say reports, even as it has sought relief from the IMF.The Pakistan Navy has launched Operation Muhafiz-ul-Bahr (Protector of the Seas) to escort national shipping and ensure the continued flow of energy supplies through unstable waters.While there is talk of “massive" untapped reserves and a potential partnership with the U.S. for exploration, experts note that current domestic production remains low and these claims are largely unproven.

Local oil marketing associations have warned that the entire petroleum supply chain could collapse due to new tax policies and mandatory guarantee rules that threaten to trigger fuel shortages.

With Reuters, agency inputs

News explainers Ease Prices Or Obey IMF? Why Iran War Oil Shock Has Left Pakistan In A Bind

Read More