The Petroleum Price Stabilisation Fund: A Policy in Search of a Mechanism
Prime Comment #39
The government has announced the establishment of a “Petroleum Prices Stabilisation Fund (PPSF)”, characterising it as a measure to protect consumers from fluctuations in international oil prices. The concept appears to be fascinating. However, in practice, it confronts fundamental contradictions, making it unlikely to perform as intended.
The first issue is theoretical in nature. Funds for petroleum price stabilisation do exist and operate, but only in the oil-exporting countries. Chile’s copper stabilisation system, Saudi Arabia’s reserves and Norway’s Government Pension Fund all follow a simple rule: when commodities export revenues are high, save; when they fall, spend. However, in the case of Pakistan, as it is a net importer of oil, it does not have any windfall from petroleum earnings to save. What it has is a Petroleum Development Levy (PDL) with a current target of Rs 1.68 trillion for FY2027, which is a surcharge on consumers rather than a surplus from production. Stabilisation is not achieved by a stabilisation fund that is based on taxing consumers more when prices decrease and less when prices increase. It is intertemporal redistribution with extra steps.
The second layer of the problems is fiscal. The PDL is the federal government’s primary non-divisible revenue source that completely bypasses the NFC award. It is not subject to parliamentary approval for adjustment and has been gradually increased from Rs 60 per litre in 2024 to over Rs 100 per litre on petrol in 2026. Any diversion of levy proceeds to the PPSF diminishes overall fiscal revenue at a time when the FBR is already falling short of its targets.
Third is the institutional issue. The PPSF establishment notification does not propose any operational framework, including guidelines for the fund’s accumulation or disbursement, a cap on liabilities and governance structure. The Petroleum Division, OGRA, and the Finance Division are instructed to “work on modalities” independently. Stabilisation funds without pre-committed rules tend to become vehicles for ad hoc political pricing rather than true smoothing, as demonstrated by international experience, especially the Philippines’ Oil Price Stabilisation Fund, which was eventually abolished after the fund resulted in recurring fiscal deficits for the government.
The last issue is the IMF program. According to the IMF’s recent country review report, fuel subsidies are “distortionary and fiscally unsustainable”, and any policy response to high fuel prices must be “targeted, temporary, limited, and budgetary neutral”. None of these describes a stabilisation fund that permanently absorbs an increase in price for all consumers. The government will need to explain how the PPSF is compatible with the program’s commitment and accept that it will remain a notified head with no money in it.
The PPSF, as currently constituted, is a notified accounting head with no capital, no rules, and no clear compatibility with the IMF programme. Until the government answers the basic questions like where the money will come from and under what rules it will be spent, this remains a headline without a policy behind it.