uel and food prices were already at a high in 2021 after a faster than expected recovery from Covid-19. The already high prices further shot up in the last few months due to the war in Ukraine. Global natural gas prices have almost doubled in the past five months and global oil prices have risen by about fifty percent.

Many NATO allies are resisting a complete ban on Russian energy exports. However, if Russia is put under a complete energy embargo, the oil price per barrel could reach $150, rapidly boosting global inflation by another 2 percent (the impact would be much higher in countries like Pakistan).

If history is a guide, we should remember that fuel inflation in the past (in the 1970s, after the Arab-Israel war led to an oil embargo) has been associated with deep recessions, hurting the lower- and middle-income earners very hard. The World Bank’s recently released “global economic outlook” has also warned of a recession due to recent fuel inflation, which may persist for a few years.

While consumers worldwide are feeling the heat of costly fuel, the situation is harrowing for developing countries where the purchasing power of millions had already eroded due to the livelihood disruptions during the Covid-19 pandemic.

Governments around the world are trying to cope with fuel inflation in various ways. Some are passing on the prices to consumers, others are exploring the option of targetted subsidies, and still others are taking measures to minimise their energy imports through rationed and rational use.

Global fuel inflation will seriously affect Pakistan’s economy due to its dependence on imported fuels. The current government initially showed a populist reluctance to pass on the global energy prices to domestic consumers. However, facing the challenge of a rising current account deficit (dollar deficit) and weakening currency that required urgent support from the IMF, it eventually raised the prices of petrol, diesel oil and electricity. At the same time, an increase in gas prices is on the cards.

In turn, increased fuel prices have tidal effects on the price of electricity generation, cost of plying public and private transport, cost of agricultural production and processing, cost of manufacturing and consumer price index. Resultantly, Pakistan’s headline inflation quickened to 13.8 percent in May 2022, the highest level in more than two years. The food prices in Pakistan have surged 17.3 percent and transport costs surged 31.8 percent in May 2022 compared to a year earlier. The State Bank of Pakistan (SBP) has already raised policy rates by 675 basis points to check rising prices. The increase in policy rate will slow down the economy (beneficial for macro-economic stability, but bad news for the micro-economy at the household level). However, it cannot reduce the nearly inelastic demand for energy. Thus, fuel inflation will drive the cost of doing business and the cost of living in Pakistan.

While consumers worldwide are feeling the heat of costly fuel, the situation is harrowing for developing countries where the purchasing power of millions had already eroded due to the livelihood disruptions during the Covid-19 pandemic.

There is no shortcut to shield the consumers from higher energy prices. Over short time horizons, households and businesses cannot easily cut energy use in response to rising costs, leaving less to spend on other goods and services. The longer prices stay high, the more their effects evolve, especially for lower- and lower-middle-income earners who would have to compromise their spending on health and food to meet the energy expenses.

Such compromises will have a drastic effect on more than 70 million Pakistanis who are living in multidimensional poverty. According to the pre-Covid-19 statistics (National Nutrition Survey), 55 million people lived below the national (income) poverty line in Pakistan. Almost 72 million experienced mild to severe food insecurity. Drinking water in every second and third household was contaminated with coli form and E-coli bacteria, respectively. Four out of every ten children under the age of five were stunted. A vast majority of the population is not covered under any social protection system.

Covid-19 has turned these numbers obsolete. The situation has likely deteriorated after the pandemic. Even if that were not the case, these numbers are too scary. We are talking of tens of millions of people most vulnerable to current inflation and a possible recession.

There is no denying that the government of Pakistan cannot continue with “across-the-board” fuel subsidies due to the twin deficit (rupee deficit and dollar deficit). However, the most vulnerable and excluded segments of society need to be protected against inflation and a possible recession, and that too, within the framework of the IMF agreement.

The IMF advocates for agile fiscal policies amidst the food and fuel crises. It advises that the government focus on the most urgent spending needs and raise revenue to pay for them. In IMF’s words, “Government responses to the surge in international commodity prices should give priority to protecting the most vulnerable. A critical objective is to avoid a food crisis while keeping social cohesion”. For countries with well-developed social safety nets, it advocates for temporary cash transfers to vulnerable groups while allowing domestic prices to adjust. For other countries, it advises “a more gradual adjustment of domestic prices (of energy) and the use of existing tools to help the most vulnerable during this crisis, while taking steps to strengthen safety nets.”

During these challenging times, the government will be judged by the people of Pakistan as well as by the IMF on what it classifies as the “most urgent spending” (requires prioritisation of spending), and how seriously it focuses on “raising revenue” to pay for them (without adopting too regressive tax collection measures).

The writer heads the Sustainable Development Policy Institute. He tweets @abidsuleri