As much as the government may want to talk down the inflation expectations, the very actions agreed with the IMF point in another direction. The IMF’s latest Country Report on Pakistan is heavily focused on energy related matters, and for the right reasons too, for most part. As it has almost always been the case, the singular focus remains on revenue measures for power, gas, and petroleum sectors.
Petroleum prices are first in line, with the Fund projecting no less than Rs855 billion in lieu of Petroleum Levy for FY23. This is not only 14 percent higher than the budgeted estimate of Rs750 billion provided in the Budget FY23 – but also borders on the impossible.
As the PL on petrol has already reached Rs37.5/ltr, it could be well before the planned timeline of January 1, 2023, for it to reach the revised upper limit of Rs50/ltr. That said, the PL on HSD has not been increased as swiftly. Baring a considerably big bear rally in international oil prices, HSD PL is all set to miss the timeline of April 2023 to reach the upper limit. The plan is for the PL on petrol to average Rs40/ltr and that on HSD at Rs32/ltr for FY23.
Of course, nothing stops the government for increasing the PL limit to whatever extent it wishes, should there be a pushing need or cushion or a mix of both. Only that it will take no less than a solid 10 percent increase in petroleum products’ demand over FY22 (which was already an all-time high). It is still early days, but a 26 percent year-on-year decline in sales during 2MFY23 does not instill much confidence.
With a slowdown in GDP anticipated, it is counterintuitive to project petroleum demand, especially HSD’s, to grow in double digits. Mind you, the government has also clearly hinted at restoring standard rate of Genera Sales Tax on petroleum products, upon reaching maximum PL. There is also a small matter of doubling custom duties on crude oil from the current 2.5 to 5 percent. Whichever way you see, two things are almost certain. Petroleum prices are not coming down and petroleum revenue target will not be met.
Then comes an even bigger adjustment in gas tariffs, which could average 70-80 percent higher than prevailing tariffs. Recall that the regulator had determined an increase in consumer end prices of an average 45 percent to Rs928/mmbtu. But the plan is to go well beyond the prescribed number to fetch an additional Rs120 billion over and above the Estimated Revenue Requirement of the two Sui companies. This will be done to make up for the recovery of previous years’ losses (most of which is contentious). Be that as it may, the consumer end gas tariffs could go up from Rs640/mmbtu to around Rs1,100/mmbtu – a 70 percent increase.
Buckle up.
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