The Cost of Living

The purchasing power of an average Pakistani has not changed in 10 years. For many, it has likely worsened. Outside of the confines of government-defined consumption baskets, the experience of downward mobility, constraints on aspiration and downgrading on basics, is readily prevalent among most Pakistanis.

Much of this is down to domestic economic dysfunction. A decades-long productivity crisis produces constraints on the economy’s ability to service its own consumption and growth needs. It doesn’t earn enough dollars to import the goods and services it wants. And it doesn’t make enough efficiently and cost-effectively enough to offset the imports. As a result, the country’s trajectory is of booms followed by painful busts where the economy is strangled via high interest rates, forex controls, and higher taxes to make national accounts more palatable under IMF tutelage.

It’s exactly this type of asphyxiation that Pakistan has been under since the last bust in mid-2022. The sitting government presents this as a binding constraint of ‘living within our means’ to fend off the prospect of sovereign default. In a narrow enough sense, this is correct. The country’s existing productive base and economic model is simply not capable of sustaining consumption and growth without imploding. But there are deeper questions to be posed to the state. Why hasn’t the productive base been transformed over a longer period of time? And why are we clinging on to an economic model that can’t afford to grow without imploding on itself?

If domestic dysfunction is a major part of the story, international crises add another layer on top. COVID, Russia-Ukraine, and Trump’s tariff convulsions have all played a major part in Pakistan’s decade of stagnation. The most recent shock comes via the US-Israel war on Iran that’s sent oil prices spiralling past the hundred dollar mark and disrupted global energy supply chains.

Pakistan is one of the unfortunate subset of countries that is both an energy importer and perennially starved for foreign exchange. So even though it’s managed to ensure supplies of oil (though less so of LNG), it has had to pass the full force of the price increase onto its hapless citizenry. In the space of a few months, prices at the pump have hit peaks of nearly 80% more than the pre-war baseline. At the time of writing, despite the gradual ease up in global prices, the retail cost of petrol still remains nearly 50% higher than what it was in late-February.

Given the economy-wide centrality of oil in transportation and logistics, this price increase has set off a fresh round of inflation. Still reeling from the cost-of-living crisis of 2023 and 2024 (when inflation hit a multi-decade high of 40%), the recent numbers have inched once more into double-digit territory. Just when it seemed the stranglehold of ‘macroeconomic stabilization’ was about to loosen just a bit, or at the very least constitute a new normal, Pakistani households are facing the prospect of yet another body-blow to their household budgets.

A rise in petrol prices means a rise in the price of personal commuting. It also means an increase in the prices of privatized transport, such as intercity buses and intra-city rickshaws and ride-hailing services. Combined with the downstream impact on electricity and LPG prices, this makes around 20-25% of total household spending susceptible to an oil price shock.

How do households navigate this crisis? Cutting back on consumption is the most obvious response. Recent PSLM/HIES numbers demonstrate this via a reduction in discretionary spending across a variety of domains (including leisure, and the type of food being consumed). For households already under a hard constraint, there isn’t much discretionary spending in the first place, so the tradeoffs are far more stark, such as in education where families have switched to lower-cost private schools or to non-fee government schools.

But there is another type of response – self-sufficiency that bypasses the state - which Pakistani households have become more adept at during this decade of stagnation. The most obvious example is the adoption of behind-the-meter, off-grid solar across rural and peri-urban localities. Faced with crippling blackouts, exorbitant rates of electricity, and China’s burgeoning capacity in producing efficient solar panels, many have chosen a ‘guerrilla green transition’ to the tune of more than 30,000 megawatts. That’s almost as much as the installed capacity of the actual grid.

In line with this spirit of self-sufficiency, will it be possible for Pakistani households to take matters into their own hands as far as the latest transport crisis is concerned? Some observers see the moment as ripe for a transition to electric vehicles, especially in the two-wheeler segment, which more than half of the population relies on daily.

On cue, we’re seeing an uptick in numbers of EV scooters (some of which are locally assembled) entering the market. This market resembles the wild west at the moment, with little regulation, lots of offerings, but none decisively proven. An associate who switched from a regular Honda ICE bike to an EV scooter, says the economics make sense for those with fixed commutes under 40-50 kilometers per day. The provision of being able to charge both at home and the most frequent destinations is an added bonus.

However for those using their motorbike to cover greater distances (delivery riders and logistic workers), the EV transition isn’t a real solution just as yet. Range anxiety, battery health, and the unreliability of the actual product are all clear-cut barriers. And many are also waiting to see what the government offers in terms of making the switch more feasible.

As the government prepares its annual budget (to be tabled in the first week of June), EVs remain an important point of concern. If international analysts are correct, the era of cheap oil is mostly over. Iran’s exercise of sovereignty in the Persian gulf, and the gradual erosion of market-level coordination among oil producers, is going to produce far more volatility in the months ahead. The global context is primed for EV adoption in Pakistan.

Yet ongoing rumors are not encouraging at this point. For a bankrupt state, the budget exercise has essentially become a taxation exercise. Any avenue of consumer demand is repurposed and rethought of as an avenue for more taxation. In this vein, Hybrids and EVs are being eyed as the latest offering, with increased tax rates being suggested for both.

Strangling this adoption via taxation at this stage would be incredibly naïve. From a purely selfish perspective, EV adoption is in the government’s benefit since it reduces the state’s oil import bill – the largest drain on forex in the country. But more than that, government policy should be dictated by a much simpler axiom – if the state cannot fix the problems it created, it should not stand in the way of society as it deals with it on its own.