Zafar Iqbal
When global crude oil prices fall, ordinary citizens in most countries feel some relief at the fuel pump. In Pakistan, they feel the opposite. Between May 1 and May 9 of this year, Brent crude dropped nearly ten percent, sliding from roughly 105 dollars to 95 dollars per barrel. In Islamabad, the response was not to pass that relief along to consumers. The government raised the petroleum levy on petrol by nearly fourteen rupees per litre. The retail price climbed to Rs414.78. The citizen paid more precisely when the international market said he should pay less. This is not a policy failure. It is a policy choice, and it demands to be named as one.
The petroleum levy was originally presented to the public as a stabilisation instrument. The official logic was straightforward: when global oil prices rise sharply, the government reduces the levy to protect consumers from the full shock. When global prices fall, the government modestly recovers some fiscal space by raising it. A cushion in both directions. A tool of balance. That was the promise. The reality has been something else entirely. The mechanism, in practice, operates only in the direction of extraction. Consumers have never genuinely experienced the protective half of this arrangement. What they have experienced, repeatedly and without apology, is a government that treats falling oil prices as an opportunity to deepen its own revenue rather than lighten the public burden.
The numbers over just seventy days make the argument without needing embellishment. On March 1, petrol in Pakistan cost Rs266.17 per litre, carrying a levy of Rs84.40. By May 9, the price had reached Rs414.78 with a levy of Rs117.41. That is a fifty five point eight percent increase in the retail price over seventy days, including a thirty nine point one percent rise in the levy component alone. The international oil market did not cause this. Pakistan’s fiscal calendar did.
The reason the petroleum levy has become Islamabad’s instrument of choice is not mysterious. It lies buried in the constitutional architecture of Pakistan’s fiscal federalism. Under the Seventh NFC Award, general sales tax is shared between the federal government and the provinces through the divisible pool. The petroleum levy is classified as non-tax revenue. It bypasses the NFC mechanism entirely. Every rupee collected flows directly into federal coffers, with nothing owed to Khyber Pakhtunkhwa, Sindh, Balochistan, or Punjab. The levy is not just a tax. It is a tax designed to avoid sharing. When a government that cannot generate enough revenue through shared instruments instead turns to an instrument specifically structured to exclude the provinces, it is not practising fiscal management. It is practising fiscal centralisation dressed up as revenue policy.
The inflation consequences are now impossible to conceal. Pakistan’s consumer price index rose to ten point nine percent year on year in April 2026, returning to double digits for the first time since July 2024. Energy categories alone, covering housing, utilities, and transport, contributed more than five and a half percentage points to that figure, accounting for over half of the total inflation reading. But even this understates the true damage. Fuel is not merely a consumer product. It is an input into agriculture, manufacturing, logistics, and food distribution. When fuel prices are raised by administrative decision, the inflationary impulse does not stop at the petrol station. It travels through every supply chain in the economy, arriving eventually as higher food prices, higher freight costs, higher production costs, and higher prices for nearly everything a household buys.
The incidence of this levy is also deeply and deliberately unfair. It is a flat per-litre charge. A daily wage worker in Lyari pays Rs117.41 per litre. A corporate executive in Clifton pays Rs117.41 per litre. The nominal burden is identical. The proportional burden is grotesquely unequal. For the wage worker, that levy represents a far larger share of real income, erodes purchasing power more severely, and offers no mechanism of recovery. The petroleum levy is in practice a regressive transfer from the poor to the federal treasury, justified through the language of macroeconomic necessity while its human costs are distributed in the most unjust direction possible.
The deepest contradiction, however, is the one the government has constructed entirely for itself within its own policy framework. By raising the petroleum levy, Islamabad directly injects cost-push inflation into the economy. That same inflation then becomes the justification for tighter monetary policy. The State Bank raises interest rates to suppress the inflation that fiscal policy created. With the policy rate already at eleven point five percent, and further tightening anticipated if inflation persists, Pakistan finds itself trapped inside a loop of its own design. One arm of the state lights the fire. The other tries to put it out with instruments that simultaneously raise borrowing costs, suppress private investment, choke credit growth, and slow the very economic activity the country desperately needs. The citizen is caught in the middle, paying for both the fire and the response.
What drives this is not the oil market. It is the IMF programme. Pakistan was authorised under its current programme to raise the petroleum levy by a remaining fifty three rupees per litre in phases. The May revision is the first installment, not the last. Levy collections have already reached nearly Rs1.3 trillion in the current fiscal year against an annual target of Rs1.468 trillion. The more global crude prices fall, the stronger the fiscal incentive to raise the levy further. Pakistan has created a system in which cheaper oil for the world means more expensive fuel for Pakistanis. The government profits from price drops that should belong to its own people.
This is the nature of what has happened to the petroleum levy. It was introduced as a consumer shield. It has become a federal revenue instrument that bypasses provincial rights, punishes the poorest households most severely, manufactures the inflation it then claims to be fighting, and extracts from global price relief what should have been returned to the public. Calling it anything other than a structural injustice would itself be dishonest.
