Pakistan to save $3-3.5B as international oil prices drop

ISLAMABAD: A significant expected decline in oil prices in the global market is going to bring considerable economic relief to Pakistan, yielding annual energy import savings of $3.0 to $3.5 billion.

As crude oil prices have fallen to a three-year low of below $70 per barrel, with forecasts predicting further drops to around $60 per barrel by 2025, Pakistan’s economy stands to benefit substantially, according to the research report ‘A Path to Growth amidst Challenges’ prepared by investment advisory outlet Alpha Beta Core.

“The savings from reduced energy import costs will not only help alleviate inflationary pressures but also improve the trade deficit given that energy imports constitute around 31% of Pakistan’s total imports in the fiscal year 2024,” said Khurram Schehzad CEO of Alpha Beta Core. Lower energy costs are expected to enhance the competitiveness of Pakistani exports by reducing production costs, thus boosting overall export performance.

Additionally, the fall in oil prices coincides with a decrease in borrowing costs, the report said, as the Central Bank has cut the policy rate from 22% to 17.5%, with further reductions anticipated. Lower energy and capital costs are projected to spur business investments, stimulate economic activity, and help GDP growth surpass the forecasted 3.5% for FY25, particularly benefiting the manufacturing sector.

According to the report, these developments are poised to support fiscal stability, with the current account deficit expected to remain manageable at around 1.5% of GDP. The improved economic landscape has also prompted credit rating agencies like Fitch and Moody’s to upgrade Pakistan’s economic outlook, boosting investor confidence.

The continued decline in global oil prices presents a unique opportunity for Pakistan to realign its economic strategies and focus on growth, with policymakers urged to implement structural reforms to ensure sustained economic gains.

The reduction in oil prices is also expected to have a positive impact on the government’s fiscal flexibility. As energy costs decline, the government will save on interest payments, potentially reducing the budget deficit to under 6.0% of GDP by fiscal year 2025, said Alpha Beta Core CEO. This newfound fiscal space will provide the government with the opportunity to channel resources into critical reforms and development projects, enhancing long-term economic stability.

Additionally, the lower energy import bill will ease pressure on foreign exchange reserves, which have seen a significant improvement in coverage ratios, providing a buffer against external economic shocks.