If crude oil was not enough, currency depreciation will now be another headache come petroleum pricing decision time in another ten days. Recall that the PL has been slashed to nil on petrol and negligible on HSD, and the GST on petrol has gone down to 10.8 percent. There are not many takers of this strategy, with commentators linking it to that adopted by Musharraf when the government was paying from her own pocket. It is not quite there yet, but it appears petroleum pricing, will remain debatable, as the fiscal vs growth debate goes on.
To make matters interesting, petrol consumption was recorded at the highest-ever in July, marking two consecutive months of billion liters monthly sales. The thing with highest-evers is that one often loses sight of context. Petrol consumption has seen all-time highs for three straight months now. But in all fairness, the growth trajectory is nothing extraordinary. It is anything, but.
Pakistan’s petrol growth story is a remarkable one, having more than quadrupled in ten years. And the growth trajectory has been remarkably steady for the most part of ten years, and only stuttered for a two-year period, that includes the economic slowdown and then Covid.
The demand pattern appears to be back on path once again, and that should only reflect the “natural” rate of growth, and not induced by mouth-watering low petrol prices. Mind you, petrol is currently at the highest-ever retail price. Surely, there is no price incentive for consumers at these levels. Unless of course, the consumers spent all these extra bucks as a token of thanks to the government for not levying PL and reducing the GST.
The demand pattern primarily appears to be a function of more vehicles on the road over the years. The instances of stuttering petrol demand have coincided with significant retail price increase, in the recent past. As a matter of coincidence (or perhaps not) the two instances also happened to be the lowest growth years in over a decade.
For argument’s sake, let’s go for the fiscal dream and imagine restoring PL and GST to the fullest. That is another Rs36/ltr (30%) from current rates, and 50 percent higher than a year ago rates. First casualty will be demand, and of course some unnecessary leisure travel will be curtailed at such steep rates. Kudos for that. Reduced demand would mean lower tax collection than what is targeted, but of course still significantly higher than current scenario. There is obvious fiscal mileage to be had.
The most direct and immediate impact will be on transport inflation. Mind you, prices of transportable goods tend not to reverse once increased, even if the base petroleum price goes back. Such an increase would send the national inflation back to double digits, necessitating policy rate revision, earlier than envisaged. While, letting go of taxes sure has fiscal consequences, higher policy rate has that too, in terms of higher interest charges.
Argument is made how unchecked demand could send the current account in jeopardy. Of course, higher retail price would reduce the import burden to an extent, but apparently the government already has or is going to have a deferred payment deal on oil with Saudi Arabia – to precisely take care of this situation.
All kinds of tax reliefs have been thrown right, left and center from dairy to automobile and mobile manufacturing. Not much is ever made about the impact on imports and currency on these, and the fiscal considerations thereof. Mind you, the inflationary consequences in those cases are substantially lower than in petrol’s. This is not to say strategy ‘A’ definitely has more or less economic cost than strategy ‘B’, but simply brushing it aside on whims without research and supporting data, does not make the cut.
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