If you feel like your monthly fuel budget is spiraling out of control despite global oil prices behaving themselves, you aren’t alone. A recent research paper by the Policy Research and Advisory Council (PRAC) has confirmed what every Pakistani car and bike owner already knows: the government’s heavy reliance on the Petroleum Levy (PL) is directly driving a massive wave of cost-push inflation across the country.
Here is a breakdown of how this fiscal policy is impacting your wallet and the automotive landscape.
Higher Taxes or Higher Interest: What’s Worse For Car Buyers?
The PRAC report highlights a frustrating ‘cross-purpose dynamic’ between the federal government and the State Bank of Pakistan (SBP).
Here is how the cycle trips up the economy:
The Government’s Move: To meet revenue targets, the government directly injects inflation into the economy by slapping a massive per-liter tax (the Petroleum Levy) on fuel.
The State Bank’s Reaction: To control the resulting inflation, the SBP recently hiked interest rates up to 11.5% in April 2026, its first rate hike in three years.
The problem? Standard interest rate hikes are meant to cool down demand when people are spending too much. But you can’t ‘cool down’ the necessity of refueling your car to get to work. Instead, these higher rates just make auto financing and business loans incredibly expensive, crushing any hope of a quick recovery for the local car industry.
Read More: Petrol Price in Pakistan Reduced by Rs 4, Diesel Price Unchanged
A Look at the Rising Petroleum Levy and Inflation Numbers
We saw inflation drop to a decades-low 0.3% back in April 2025, which gave everyone a temporary breather. But that relief was short-lived. Take a look at how inflation tracked right alongside the rising Petroleum Levy as we moved into early 2026:
| Date | Petroleum Levy (PL) per Liter | Headline Inflation (CPI) |
| March 1, 2026 | Rs. 84.40 (Later hiked to Rs. 105.37 mid-month) | 7.3% |
| April 2026 | Fluctuating / Waived entirely on Diesel | 10.9% |
| May 2026 | Rs. 117.40 | 11.7% |
By May 2026, Transport CPI skyrocketed by a staggering 36.8% year-on-year, making it the single largest contributor to the country’s inflation surge.
Why Don’t Petrol Prices Drop When Crude Oil Crashes?
Ever wonder why fuel prices don’t drop significantly when international crude oil prices crash? The PRAC report exposes the exact mechanism.
When global oil prices fall, instead of passing the full relief on to Pakistani consumers, the government uses that ‘fiscal space’ to quietly raise the Petroleum Levy. They keep the pump price just low enough to avoid massive public outrage, while maximizing their tax collection. For instance, data show instances in which a 10% drop in crude oil prices was met with a 13.5% hike in the levy.
We recently saw an example of this with diesel (HSD). In early April 2026, ex-refinery diesel prices spiked to an astronomical Rs. 461.23 per liter, pushing retail prices to Rs. 520.35. To keep the retail price from going completely off the charts, the government had to waive the diesel levy entirely, bringing it down to zero.
But the moment global prices retreated in May, the government slammed the levy back on. Starting at Rs. 28.69 per liter on May 1, the government aggressively raised the levy through weekly pricing reviews, pushing it all the way back up to Rs. 68.93 by May 30.
What This Means for the Auto Sector
On one hand, the cost of running a vehicle is reaching unsustainable levels for the average middle-class daily commuter. On the other hand, because the State Bank is keeping interest rates high to fight this tax-driven inflation, car leasing and auto loans remain completely out of reach for most buyers.
Until the government shifts away from targeting fuel as its primary cash cow, Pakistani motorists will continue to bear the brunt of expensive commutes and a stagnant auto market.
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