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International oil prices are moving up and the government is not passing on the heat of the prices to the consumer by lowering the petroleum levy (PL). This has reduced from Rs30/liter at its peak to Rs6.39/liter for petrol and Rs11.72/liter for diesel. Assuming an average monthly consumption of 1.3 billion liter, the monthly revenue loss is around Rs20 billion. The question is: how can this government afford this loss? What are alternative revenues measures to compensate it? And what should be the ideal petrol and diesel prices in Pakistan?

Lately a social media debate is on-going where government is justifying lowering PL as a relief by comparing petroleum consumer prices in different countries (such as India, Bangladesh, China, Indonesia etc) where these are higher. Meanwhile, the opposing finance gurus are posting the prices in countries like Myanmar, Haiti, Afghanistan, Egypt, Ethiopia etc. where the prices are lower than Pakistan.

Beyond the politics however, there must be rationality in the argument based on Pakistan Purchasing Power, tax to GDP, tax rates in other countries, environmental and balance of payment lenses.

First: one needs to understand that petroleum consumption is not inelastic – prices have a bearing on consumption. Pakistan is an oil importing country, and any increase in consumption has a bearing on the current account deficit. The magnitude of deficit becomes higher when the prices are higher. When prices are high, the rationing of consumption makes more sense.

The other thing we need to look at is the abysmal tax collection in Pakistan and the high fiscal deficit that is the prime reason for frequent boom and bust cycles – current account slippage is due to fiscal in many ways in the long run. Thus, the tax (the more accurate term is “revenues” as petroleum levy is now recorded as non-tax) collection cannot be compromised. We need to plug in the tax gap.

In Pakistan, the GST is amongst the highest with all the economies in comparison. In Pakistan, direct taxes are high too. Now if the government gives relief to the businesses and consumers, it is better in the form of lowering GST. But when the revenues on petroleum are forgone, it is hard to give relief on the other items.

The other way is to look at it from overall energy pricing and consumption perspective. Electricity prices in Pakistan are higher than many other countries. Prices for domestic gas (which is depleting fast) are much lower. And petroleum prices are relatively low. We are living in a world where heating and industries are mainly run on electricity and transportation is also moving in that direction. Seeing that, the pricing incentive is highly skewed in Pakistan. Plus, from the factor of production point of view, electricity is a bigger factor than diesel; and petrol is nowhere in the race. Pricing signal is imperative. Look at the impact of lowering CNG prices on the domestic gas.

Environment is another important factor what the policymakers in the world see in days of global warming. There are road congestion tax and higher taxes on petroleum consumption in richer countries to lower the burning of transportation fuel.

Looking at all these factors, it makes sense to keep petroleum prices higher and use the tax collected to make justification for lowering electricity prices – by slashing GST on it. The new FM is thinking of lowering the GST on goods in Pakistan and to compensate for the revenue losses, there ought to be other avenues for revenue collection.

On the purchasing power argument, there are countries with similar purchasing power with higher petroleum prices. Some countries may have low prices, but then purchasing power does not only matter for petroleum, but it should also be relative to other items being consumed in the country. Back in 2013, the petroleum prices were around Rs115 per liter and today the price is much lower. Is Pakistan’s purchasing power today not better than 2013?

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