Petroleum prices divide opinions. There is growing concern in the “expert” community that the government’s recently adopted approach of maintaining petroleum prices at current rates, is not the wisest one. Not sure the lot will spare the government when the monthly CPI reading shows the impact of higher petroleum consumption as per the prescription. The road is easier seen than walked.
From the highs of Rs30/ltr levied on account of Petroleum Levy (PL) as recently as November 2020, the PL has come crashing. It touched to (probably) the lowest ever at Rs4.74/ltr for petrol, as the government resisted the temptation to increase prices recommended by Ogra. The PL on HSD at Rs8.8/ltr is also the lowest since December 2018 and less than half the 24-month rolling average.
What is crystal clear is the government’s desire to keep prices under control, even if it comes at the cost of lost revenue. Mind you, inflation concerns have not eased as food prices continue to keep headline inflation high. Trying to maintain prices where the government has some form of control, is what is at play here. And it does not feel completely out of place either, as inflation has time and again being reported as the single largest problem faced by commoners.
On to the revenue loss. Having achieved 82 percent of the targeted PL in 9MFY21, even a very bad 4QFY21 would yield a shortfall of circa 10 percent from the target. Mind you, the Rs450 billion PL target was a very aggressive one to start with and getting close to it should be considered a plus. The real problem may be beyond this point, as the PL at current rate will be difficult to sustain for much longer, in terms of fiscal challenges.
Much will depend on petroleum consumption, the outlook of which seems bright given increased economic activities. If benchmark oil at $70/bbl is the reference point, it will become exceedingly difficult for the government to continue with the current strategy beyond FY21. At the same time, this should serve as a reminder why it is a good idea to have a broader tax base and a more diversified set of income avenues than the ones Pakistan currently has.
And one does not have to look too far to plug in some of the forgone revenue. The recent inquiry commission report on petroleum crisis put down the tax losses due to smuggling to a whopping Rs240 billion per annum. Even if half of it gets sorted, lower PL won’t hurt and it will be a win-win.
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