The Prime Minister may have pinned it on the rains, but the truth of the matter remains that the Rs30/ltr maximum Petroleum Levy (PL) limit was always going to give in, at the first signs of test. This is what happened for the second month running.
The Arab Light crude oil went dearer by 5.6 percent in August 2020 (5.7% Jul). Rupee lost 0.6 percent to the dollar over last month (0.5% Jul). Ogra recommended an increase of Rs9.35/ltr (Rs9/ltr Jul). The government could not do that. It kept the prices unchanged (+Rs3.8/ltr Jul). What gave? More cut in the PL. It went down by another Rs5/ltr (Rs 3.3/ltr Jul). You could not possibly write the script.
The inability to pass on the recommended price increase has been marketed as a relief in the form of a Rs17 billion “subsidy”. Those critical of the move are terming it a “loss” of the same quantum. Giving up on potential revenue could surely be termed relief but not subsidy. The context is Rs450 billion unrealistically budgeted in PL for FY21. For more context, PL in FY20 was Rs310 billion – highest ever and Rs100 billion up from last year. Lower oil prices were at play and that helped. Expecting a repeat performance, when oil prices have almost no chances of going anymore south, is optimistic at best.
This space has maintained that the PL target for FY21 appears way off the mark and that the government would struggle to deal with any upward pressure from international oil prices (see: Petroleum Levy scenario analysis, published Jun 17, 2020 & Islamabad’s Petroleum Levy daydream, published Jun 15, 2020). Imagine this. Arab Gulf benchmark for gasoline averaged $56/bbl in FY20. If it even averages $50/bbl in FY21, the government would do well to go beyond Rs20/ltr on PL, if it intends to keep the consumer price intact.
But its not a lost battle yet. There is hope on the demand side. If the petroleum sales in June and July was not an anomaly, Islamabad must not fret on a few billions forgone in an attempt to keep the prices halted. The combined petrol and HSD sales in FY20 was 17 billion liters. The highest ever yearly number was achieved inFY18 at 19.5 billion liters. If FY21 comes closer to FY18, the PL target could become a reality with PL at even Rs25/ltr. Even PL much in line with FY20 average at Rs20/ltr could fetch PL in excess of Rs400 billion. This was unthinkable at the start of the year. All hopes now rest on petroleum sales.
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