Economy struggling under weight of global energy shock: report

LAHORE: Pakistan’s economy is struggling under the weight of a global energy shock that has dampened growth, stoked inflation, and strained the country’s external accounts, according to a quarterly report prepared by the Modelling Lab of the Innovation and Technology Centre at the Lahore School of Economics. The report, covering the fourth quarter of FY 2025-26, was authored by Dr Moazam Mahmood, Professor of Economics; Dr Azam Amjad Chaudhry, Dean of the Faculty of Economics; Amna Noor Fatima, Manager and Data Analyst at the Modelling Lab; and data analysts Anodha Liaquat and Syeda Khadeeja Batool. With Pakistan importing approximately 0. 5 million barrels of oil per day, oil prices running USD 25 to USD 30 per barrel above their long-term trend over the past three months have reverberated across virtually every macroeconomic indicator. Independent analysts now place GDP growth for FY 2025-26 at 3. 1 percent, falling notably below the government’s own projection of 3. 7 percent. The IMF and the Asian Development Bank had estimated growth at 3. 6 percent and 3. 5 percent, respectively, though both assessments were produced before the full weight of the energy shock became apparent. With Pakistan’s annual oil import bill standing at roughly USD 13 billion, even a single quarter of elevated prices adds an estimated 1 billion to that burden. Once data for the final two months of the fiscal year is fully incorporated, growth could slip further to 2. 8 percent — a figure analysts describe as a force majeure outcome, but one that nevertheless demands honest acknowledgement. The strain is equally visible in Pakistan’s external accounts. Exports average just USD 3. 5 billion per month, while imports hover around USD 7 billion, pushing the current account into deficit. Import expenditure surged to USD 7. 6 billion in April alone, and this deteriorating trend is expected to persist through the close of the fiscal year. Remittances, while significant, remain an exogenous variable and cannot offset structural pressures arising from within the economy itself. Also read: Dar says Pakistan seeks economic strength after diplomatic success The episode underscores that the most immediate threat to macroeconomic stability is not the pace of growth but the scale of energy imports, and that policy must urgently prioritise energy substitution if the economy is to grow on an affordable and sustainable basis. Not all of the economic picture is bleak. Agriculture has staged a meaningful turnaround, largely as a result of the government correcting what analysts characterise as a self-inflicted policy error. For two consecutive years, authorities had abandoned a four-decade-old support price floor for the agricultural sector — a decision that led to a measurable drop in the aggregate value of crops and weighed directly on agricultural growth. The restoration of the wheat support price in 2026 has reversed this trend, and the outlook for the sector is considerably more positive. Large-scale manufacturing has also shown signs of recovery after an extended period of stagnation and contraction. Having flatlined in FY 2023-24 and contracted in FY 2024-25, the sector registered growth of 6 percent in the second and third quarters of the current fiscal year, driven primarily by the automotive industry. Analysts caution, however, that a single sector’s revival does not confirm a broader industrial resurgence. Services growth similarly recovered to 3. 7 percent after near-stagnation in FY 2023-24 and modest growth of only 1. 4 percent the following year. The energy shock has fed directly into consumer prices. Independent analysis places inflation for FY 2025-26 at approximately 9 percent, substantially higher than the IMF’s April 2026 estimate of 7. 2 percent and the government’s own projection of just under 6 percent. The dominant driver is commodity prices, which alone account for 4. 6 percentage points of the estimated inflation rate — roughly half of the total. The consumer price of petrol rose 54 percent over the year from June 2025 to June 2026, while kerosene surged 85 percent, high-speed diesel climbed 53 percent, electricity increased 25 percent, coal rose 8 percent, and natural gas registered a staggering increase of 126 percent. Weighted by their respective shares in the energy consumption mix, these price rises translate into a weighted-average increase of 8. 9 percent for consumers across the fiscal year — contributing 4. 6 percentage points to overall inflation. Consumers have effectively been hit twice over. Of the 8. 9 percent rise in energy prices, just over one-third is attributable to increases by energy suppliers, while just under two-thirds reflects higher taxation imposed by the government itself. The government’s own fiscal decisions, therefore, account for roughly one-third of the total inflation rate. For all the current difficulties, the government warrants recognition for bringing double-digit inflation under control. Rampant price pressures that prevailed from around the turn of the decade through FY 2023-24 were driven substantially by currency depreciation — a 25 percent fall in FY 2018-19 and a further 40 percent collapse in FY 2022-23. The government has since halted this pattern of major depreciation over the past two years, a considerable achievement given the ongoing pressure from global energy prices. Stabilising the exchange rate reflects an understanding of the devastating downstream consequences that currency weakness imposes on growth, inflation, and household welfare. Perhaps the most sobering finding concerns poverty. The Lahore School’s Modelling Lab estimates that extreme caloric poverty, which had declined consihstently from FY 2000-01 and stood at just 4. 5 percent between FY 2014-15, rose from 16. 5 percent in FY 2018-19 to 21. 1 percent by FY 2024-25 — an increase of nearly five percentage points in five years and a reversal of almost two decades of progress. This deterioration is directly attributable to slowing GDP growth, which fell from a trend rate of 4 percent to around 3. 2 percent after 2018, compounded by the inflation spike triggered by successive waves of currency depreciation. The government’s success in curbing depreciation and, by extension, inflation is therefore not merely a macroeconomic achievement — it carries direct implications for household welfare and poverty outcomes. Analysts are clear, however, that stabilising inflation is only part of the challenge. Reviving GDP growth to levels sufficient to meaningfully reduce poverty remains the defining economic task ahead. Copyright Business Recorder, 2026

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