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It was only a matter of time before the government’s ability to continue to tax petroleum products was going to be challenged. In the last three price revisions starting February 1, 2021, international crude oil prices have continued the bull run. The reference Arab Light crude oil has increased by 16 percent in the last month – but the petroleum retail price has stayed the same.

What gave? Taxes. The honeymoon is surely over, as feared earlier. Truth be told, the government would not have hoped to make anywhere close to what it has in the first six months of the fiscal year under the head of Petroleum Levy. But the tougher days are back now, and with every passing day, the likelihood of achieving the lofty annual target of Rs450 billion seems more distant. For a brief while, it seemed on track.

Back to the prices. The PL on petrol at Rs12.65 per liter is the lowest in 30 price revisions since May 2019. This is the first time since the IMF program was signed in July 2019 that the PL has dropped from Rs15/ltr. It was earlier widely anticipated that Rs15/ltr is the agreed upon floor on the PL between Pakistan and the IMF, as stipulated in the Memorandum on the policies laid down in the Fund document.

Whether or not that position has officially changed would be known once the detailed IMF review is out, but it sure does show that anything significantly higher than the current price range is politically very tough for the government. And if year-on-year price change is a key consideration, then Islamabad is in for testing times ahead, as crude oil prices had started to come down around the same time last year, offering cushion to maximize taxes.

Should crude oil remain north of $60/bbl (more and more voices are reverberating that call) the government will find it exceedingly difficult to make more room for PL beyond Rs15/ltr. Mind you, the government is fresh from a rather sizeable power tariff hike and would not have wanted to send another price shock right at the cusp of senate elections. The power price increase does offer a breather in terms of additional GST collection to the tune of Rs35-40 billion, which may not necessarily offset the potential PL loss, but is nonetheless welcome.

There is little point throwing India, Europe, Guatemala petrol price comparisons at this point. Yes, the tax incidence has been significantly lowered on petrol, and in dollar terms the retail price may well be one of the lowest, if not the lowest, among all major oil importing countries. But there is little comfort for the paying consumer in knowing that citizens in Delhi or Paris are paying more. It is all relative. And the government appears well-aware too – hence the move to lower the tax. More of the same looks in line for the months to come.