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Businesses began 2025 with some good news as the Ministry of Finance announced new fuel prices, revealing that the diesel price hike was lower than earlier predictions. The price of High-Speed Diesel (HSD) now stands at 258.34 rupees per litre after experiencing a price increase of 2.96 rupees.

This is significantly lower than the initial expectation of a 3.62 rupee increase. To grasp the magnitude of the difference, the initial hike in HSD prices was nearly 22.3 percent higher than the one recently just imposed.

However, the price of petrol rose sharply compared to early estimates. Although petrol prices changed by only 56 paisa to settle at 252.66 rupees per litre, the surge in prices was much higher than anticipated.

Businesses that offer petrol allowances for their employees often pay the exact amount to commute to and from work to their residence. It is possible that businesses will have to increase these allowances especially given how news regarding the price hike comes at the start of the year. This is likely to increase costs for businesses while also decreasing profit margins for business owners.

The increases in the price of fuel are also detrimental to the economy as they increase transportation costs, hurting transportation companies the most. Another sector that suffers tremendously due to the spikes in diesel prices is agriculture, which relies on tractors and water pumps that run on diesel.

More worrying than the price hikes themselves is the inaccuracy of the estimates surrounding fuel prices. With the actual petrol price hike being 409 percent larger than the expected one, businesses are beginning to grow worried. While the petrol price hike will impact operations, experts believe that differences between expectations and reality cause businesses to grow weary while making decisions.

These fluctuations show that businesses can’t rely credibly on estimations, adding to the uncertainty in the business environment that already exists. There have been countless instances in the previous year when estimates were wildly off as they predicted prices to rise while they remained unchanged instead.

Even though the price of diesel remains lower at this point compared to January 2024, this remains a great achievement of the current government. It has managed to keep prices relatively stable despite rapid inflation surges that were witnessed in previous periods, such as in May 2023, when inflation reached as high as 38 percent.

According to Express Tribune, however, the premium on oil is $8.69 per barrel, keeping in view the current rate of petroleum levy, general sales tax and currency exchange rate. It could be beneficial for businesses in the coming year if the petroleum levy is revised downwards to help them.

Pakistan’s economic situation is far from enviable as Islamabad’s tax target for December 2024 is expected to suffer from a colossal shortfall of 80 to 90 billion rupees, according to The News. This shortfall comes despite governmental efforts to boost taxation revenue by expanding the tax net.

There is a silver lining in the fact that the Federal Board of Revenue (FBR) is expecting a collection of 70 billion rupees as the deadline for corporate sector returns approaches. According to Geo News, this follows the announcement of the presidential ordinance to levy a staggering 44 per cent tax on banking sector returns.

The 44 per cent tax, however, is not as large as it used to be. The maximum rate had been negotiated down from 55 per cent as per an agreement for the tax year 2025.

The aforementioned agreement reveals that the FBR could raise a whopping 70 billion rupees from the banking sector, which would allow Islamabad to meet its taxation target.

As it stands, the FBR has faced a shortfall of 340 billion rupees in the first five months of the financial year (FY) 2024-25. The gap is the result of Islamabad setting the revenue target at 4.63 trillion rupees, while the FBR was only successful in collecting 4.29 trillion rupees. The numbers represent a revenue shortfall of 7.63 per cent from the targeted amount.

With December’s shortfall ranging between 80-90 billion rupees, the overall shortfall will rise by approximately 22.2 per cent. The shortfall in the FBR’s targeted revenue amount might increase to approximately 425 billion rupees, indicating the economy would close its first half of the fiscal year 2024-25 with a large deviation from its target.

It is concerning how Pakistan will manage to plug this shortfall in revenue, which is seemingly increasing without bounds. Experts are predicting a potential straining of ties between Islamabad and the International Monetary Fund (IMF) if the government does not implement strict corrective measures.

Finance Minister Muhammad Aurangzeb, however, displayed confidence in a public interview earlier when questioned about the shortfall in tax revenue. He further stated that the government is taking the necessary steps to boost taxation levels, which could be an effort to maintain the IMF’s goodwill.

Aurangzeb has also expressed great confidence in his claims regarding the IMF’s continued support in the near future. However, with the government lagging behind the revenue target by almost half a trillion rupees, it is difficult to judge if Islamabad can truly meet revenue targets in the future.

Owing to frequent fuel price hikes, business owners and citizens alike might not be surprised to know that the price of diesel and petrol might rise once the Oil and Gas Regulatory Authority (OGRA) submits its calculations to Islamabad. According to Dawn, the price of diesel is expected to rise by 3.62 rupees while petrol will increase by just 11 paisa from January 1, 2025.

It is quite obvious that this will spell bad news for transport company owners. The cost of daily operations will increase sharply, as fuel is the largest material input in transportation companies.

Transport companies could now see lower profit margins with rising operational costs. The only way these companies can avoid shrinking profit levels is to pass on these costs to their consumers in the form of higher fares. That could, however, cause a fall in the number of customers willing to travel with companies that raise their fares.

Another sector that will be hit hard, and is often overlooked when considering the effects of higher fuel prices, is agriculture, where a significant number of farms rely on water pumps for irrigation.

A report from the University of Veterinary and Animal Sciences in Lahore reveals an overwhelming majority of farm owners possess a water pump, with 73.3 per cent of farmers leaning towards using groundwater over surface water. However, with diesel prices rising, farmers are to bear the burden of extracting groundwater using pumps as it will be more expensive now.

The plight of farmers does not end here, as tractors also require diesel to operate, causing a sharp rise in the costs that farmers will have to pay now. The agricultural sector is responsible for 36.43 per cent of employment in Pakistan, and falling profit margins due to diesel price hikes may result in landlords considering layoffs to maintain a healthy stream of profits.

This might cause food prices to increase further if farmers pass on the additional costs they incur, or they will have to absorb these costs to satisfy customers while their profit margins fall. The impact of rising diesel prices will be most pronounced on sugarcane producers as sugarcane production alone consumes approximately 42 per cent of the total annual household water demand of Pakistan, according to the Pakistan Institute of Development Economics.

Export-oriented sectors that are located further inland will suffer too. This is because the cost of transporting goods from factories to Karachi port will rise if fuel prices rise. Export competitiveness for sectors such as surgical instruments and textiles will drop. This is because Sialkot and Faisalabad are over 1300 kilometres and over 1100 kilometres from Karachi, respectively.

If the expected price hike is realised, the price of diesel will come back to exactly what it was at the start of the year. While some claim this is the result of dropping inflation rates from 38 per cent in May 2023 to just 4.9 per cent, it is not the entire truth.

The average price of crude oil per barrel was $77.64 in 2023, while it was just $73.23 in 2024. Diesel prices in Pakistan, therefore, have risen over the past year in real terms, even if they appear to be stable in nominal terms.