Pakistan’s economy, like many developing nations, remains sensitive to fluctuations in petroleum prices, as fuel costs directly affect everyday lives and government revenue streams. Recently, Prime Minister (PM) of Pakistan was quick to claim credit for the consecutive reduction in retail petroleum prices, marking the fourth fortnight in a row of price cuts. The relief, especially in motor gasoline prices, has not only reached a 21-month low in rupee terms but has also marked a significant Rs75/liter reduction from the peak of exactly a year ago. This welcome respite comes after months of economic strain and high inflation rates that had severely impacted the masses.
But does the PM truly deserve the credit for this dip in petroleum prices? And what does it mean for Pakistan’s larger fiscal landscape? In this article, we explore the reasons behind the price drops, the government’s fiscal strategy, and the broader economic implications of the ongoing revenue challenges.
The Fall in Retail Petrol Prices: Should the PM Take Credit?
The reduction in petrol prices in Pakistan has largely been driven by external factors, particularly the international reference price for the RON 92 grade falling to $74.91 per barrel—its lowest point in three years. However, attributing the entire credit to the government is debatable. Yes, the government has refrained from increasing the Petroleum Levy (PL) for six straight fortnights in the new fiscal year, which certainly helped maintain price relief. The current PL stands at Rs60/liter, unchanged for over a year. This has allowed domestic prices to reflect global downward trends more closely.
Yet, the PM’s claim to credit remains a double-edged sword. While he might deserve recognition for resisting the temptation to hike PL during a time of inflationary pressure, it’s crucial to remember that the current fiscal policies are not entirely of the government’s making. External market conditions and Pakistan’s reliance on imported oil have played a significant role in this temporary price relief.
Petrol Prices in Dollar Terms: Historical Context
While retail petrol prices in rupee terms are at a 21-month low, they are far from the lowest when adjusted for the dollar. In fact, petrol prices in dollar terms were cheaper back in May 2022, nearly two and a half years ago. Currently, petrol sits at 89 cents per liter—the lowest since the early days of the Pakistan Democratic Movement (PDM) government, which controversially extended the petroleum subsidy via Petroleum Development Claims (PDC) longer than expected.
Over the last 30 months, petrol prices have averaged $1 per liter, even as oil prices, currency fluctuations, and tax policies have shifted. This context is crucial because the real cost of fuel for Pakistanis is more accurately reflected in dollars due to the import-dependent nature of the economy.
Pakistan’s Ambitious Revenue Targets and the PL Dilemma
One of the government’s most significant challenges this fiscal year is the ambitious revenue target from petroleum consumption. For FY25, the government has set a target of Rs1.29 trillion from petroleum levies—a hefty 47% increase from last year’s Rs869 billion collection. However, with one-quarter of FY25 already in the books, the government has suffered a revenue shortfall of nearly Rs45-50 billion due to the unchanged PL and a significant drop in sales, which have remained 10% lower than the previous year.
The situation is peculiar, given the reduced retail petrol prices should have spurred demand. Yet, sales continue to slump. This dip in consumption raises questions about potential fuel smuggling across Pakistan’s western borders, which many blame for the unexplained shortfall. The government’s failure to increase PL earlier in the fiscal year will likely make it impossible to meet the lofty FY25 target, creating a massive fiscal gap.
Fiscal Hole and the Risk of a Mini-Budget
Given the massive revenue shortfall, the government may have no choice but to resort to a mini-budget to plug fiscal gaps. Already, fiscal pressures are mounting, with energy subsidies causing strain. The center’s Rs50 billion electricity subsidies may be financed by cuts in development spending, which could have long-term consequences. Meanwhile, Punjab’s equally controversial subsidy plan will make it even harder to balance the budget.
As Pakistan edges closer to an International Monetary Fund (IMF) agreement, it becomes increasingly likely that the government will be forced to introduce new taxes or increase existing ones. The IMF, which closely monitors Pakistan’s fiscal health, has not forgotten the government’s missed revenue opportunities, and it’s only a matter of time before these shortfalls lead to additional taxes on the already burdened public.
Missed Opportunity: Why the Government Should Have Increased PL Now
The recent window to increase the Petroleum Levy without raising retail prices was perhaps the best chance the government had to address revenue shortfalls. With petrol prices on the decline, a hike in PL could have been absorbed by consumers without significantly impacting overall inflation or living costs. However, the government’s reluctance to do so, possibly due to political considerations, means that the opportunity has been missed.
Ironically, while the government has been hesitant to raise petroleum taxes, it has continued to impose taxes on electricity bills—an approach that is much more counterproductive. Taxes on electricity are regressive, disproportionately affecting lower-income households and slowing economic growth. Petroleum taxes, by contrast, are viewed more favorably by global institutions like the IMF, as they tend to have less distortionary effects on the economy.
The Bigger Picture: What Lies Ahead for Pakistan’s Economy
The government’s delay in addressing revenue shortfalls, whether through PL hikes or alternative taxation measures, poses significant risks to the country’s fiscal health. The loss of revenue from petroleum sales, coupled with lower-than-expected sales volumes, has already created a sizeable fiscal hole. The electricity subsidies, both at the federal and provincial levels, only exacerbate the problem.
Pakistan’s fiscal challenges are compounded by the broader economic context—rising inflation, low economic growth, and persistent energy sector inefficiencies. The government’s reluctance to take difficult decisions now, driven by political considerations, will only make the eventual fiscal reckoning more painful.
Looking forward, it is almost inevitable that the government will introduce a mini-budget to address the revenue shortfall, either through increased petroleum taxes or alternative measures such as surcharges on electricity bills. The IMF’s influence will loom large over these decisions, ensuring that any missed revenue from petroleum levies will be recouped in other ways.
Conclusion: Missed Opportunities and the Road Ahead
While the recent decline in petrol prices provides much-needed relief to Pakistan’s inflation-weary public, the government’s failure to capitalize on this opportunity by increasing the Petroleum Levy has exacerbated an already precarious fiscal situation. The revenue shortfall, coupled with reduced sales and ongoing energy sector subsidies, will likely lead to additional taxes or a mini-budget in the near future.
The government’s political hesitancy to make difficult decisions now may offer temporary relief, but it will come at a cost down the road, as fiscal imbalances widen and the IMF presses for more stringent measures. The masses, having enjoyed a brief respite in petrol prices, may soon find themselves paying the price through other forms of taxation.
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