In a rare break for the masses, Pakistan has witnessed a significant reduction in retail petroleum prices, marking the fourth consecutive fortnight of falling rates. Motor gasoline prices have plummeted to their lowest in 21 months, providing much-needed relief from the inflationary storm that has gripped the country for the past two and a half years.
While the Prime Minister has been quick to take credit for the price drop, a closer look at the situation reveals that the credit may not be as straightforward as it seems. Let’s explore whether the government truly deserves recognition and what this means for the country’s fiscal future.
A Massive Drop in Petrol Prices
Pakistan’s current petrol prices at the pump have dropped by a staggering Rs75 per liter from their peak just a year ago. In rupee terms, this is the lowest price since early 2022, driven primarily by international oil market dynamics. The reference price for RON 92-grade fuel stands at $74.91 per barrel, its lowest in three years. However, petrol prices in dollar terms are still higher than they were in May 2022, with the current price standing at 89 cents per liter, a low not seen since the early days of the PDM government.
For the average Pakistani, this drop is a welcome reprieve after facing record inflation for the better part of 30 months. However, the question arises: should the Prime Minister take credit for this reduction, or is this just a consequence of global oil trends?
The Role of the Government in Petrol Pricing
The government’s decision to maintain the Petroleum Levy (PL) at Rs60 per liter for the last six fortnights of the new fiscal year is significant. Despite the opportunity to raise the levy, the government has resisted, contributing to the price drop. However, this decision has financial consequences.
Pakistan’s ambitious revenue target from petroleum consumption for FY25 stands at Rs1.29 trillion, a 47% increase from the previous year’s collection of Rs869 billion. With one-quarter of the fiscal year gone, the country is already facing a projected revenue shortfall of Rs45-50 billion. This is largely due to two factors: the delay in increasing the PL and a 10% decline in petroleum sales compared to last year’s already historically low numbers.
While lower retail prices should theoretically increase demand, sales have remained subdued, raising concerns about revenue collection.
The Western Border Dilemma and Revenue Losses
A major factor contributing to the revenue shortfall is the smuggling of fuel across Pakistan’s western borders. The porous borders have become a gateway for illegal fuel trade, resulting in massive revenue losses, reportedly running into hundreds of billions of rupees annually. This issue, combined with fiscal leakages in the electricity and gas sectors, has left the country facing a significant financial hole.
The Looming Mini-Budget and IMF Implications
As the fiscal year progresses, it is becoming increasingly clear that the government will need to introduce a mini-budget to make up for the revenue shortfall. With the looming IMF program, the authorities may resort to unpopular measures to balance the books. The IMF is unlikely to overlook the missed revenue from petroleum levies, which could result in the reintroduction of additional surcharges, particularly on electricity bills.
The government’s hesitance to raise the PL at this juncture could be attributed to a lack of political capital. However, delaying the inevitable may have long-term consequences, as the burden of revenue collection will eventually fall on the already overburdened masses.
Missed Opportunity to Adjust Petroleum Levy
This week presented a golden opportunity for the government to increase the PL without impacting retail prices. Yet, the decision to hold back is puzzling, especially given the challenges in meeting revenue targets. Comparatively, taxes on electricity bills continue to be treated with less flexibility, despite being widely recognized as more counterproductive than taxes on petroleum consumption.
The IMF, along with international observers, is likely to press the government for more sustainable revenue collection methods. As the missed revenue from the PL accumulates, the government may be forced to make tough decisions, likely in the form of higher taxes on other utilities.
The Road Ahead: Balancing Fiscal Responsibility and Public Relief
As Pakistan navigates its fiscal challenges, the government’s decision-making will be critical in the months ahead. The PL target for FY25 is increasingly out of reach, and the shortfall in petroleum sales complicates the revenue equation further.
The delay in adjusting the PL may provide temporary relief at the pump, but it leaves the country vulnerable to fiscal imbalances that could result in harsher measures down the line. A mini-budget seems inevitable, and the IMF’s scrutiny will only increase the pressure on the government to take decisive action.
While the Prime Minister can take credit for resisting the temptation to raise fuel levies, the long-term consequences of this decision remain uncertain. Pakistan’s road to economic recovery is fraught with challenges, and the balancing act between public relief and fiscal responsibility will define the months ahead.
Comments