Petrol in peril

The government has reduced the petroleum (petrol and diesel) prices by Rs10/liter to ease the pressure of inflation in the backdrop of growing political tension. But this may not be a demand booster. Even after the reduction, petrol and diesel prices are up by 33 percent and 24 percent respectively in the last 12 months. However, that would have fiscal repercussions in terms of revenue loss and potential subsidy. Meanwhile, in the absence of a clear mechanism of clearing the subsidy dues to oil and marketing companies (OMCs), a shortage threat is looming – especially in diesel (HSD) where demand is going to be high in the upcoming wheat harvesting season.

Right after the PM’s decision to freeze petroleum prices, the international prices increased sharply in the backdrop of the Russia-Ukraine war. The price differential claim (PDC) is going to be higher and OMCs fear that government may not clear these in times. That would create serious cashflow problems for OMCs and they may refrain from importing which could in turn potentially cause shortages. At the same time, banks are reluctant to enhance credit limits for OMCs. After the Hascol fiasco, banks do not perceive the sector to be low risk anymore.

The government must define the mechanism (as soon as possible) for smooth supply of petroleum products. Otherwise, private players may refrain (or reduce imports) which would put the burden on the PSO to fill in the supply gap. Since PSO is a government-owned entity, this would keep on taking the hit on the balance sheet for ensuring adequate supply. That is not good. Already, other state-owned companies in the energy chain have hampered cashflows due to high power and gas circular debts – such as OGDC, PPL, SNGP and SSGC. Not a good idea to add petroleum in it.

At the latest imported prices, the net subsidy on petroleum products is not much considering the custom duties (CD) being charged on these products at the import stage. The CD has increased to 10 percent in the latest budget. And ex-refinery prices are inclusive of it. However, the local refineries charge 7.5 percent duty on HSD and 2.5 percent on petrol (as deemed duty) while they pay CD of 2.5 percent on crude import. The difference is adjusted in the IFEM (inland freight equalization margin). The IFEM is usually higher than what is presented in the final price sheet.

Then there used to be GST on crude which used to be adjusted on the final stage of petroleum product. However, since the GST on petroleum product has been less lately and now being zero, there was another refund (cashflow) problem developing for refineries, and that GST on crude is now abolished in the recent supplementary budget.

When the government took the decision of lowering the petroleum prices, the government was net positive on revenues on petroleum imports. For example, the imported price (including premiums) was $119.3/barrel for HSD and $117.8/barrel for petrol. And that price, the PDC is computed at Rs13/liter for HSD and Rs8.4/liter for petrol. The GST is zero. And CD is computed at Rs13.6/liter and Rs13.4/liter for HSD and petrol, respectively.

On these numbers, at monthly assumed sale of 600,000 tons of HSD and 700,000 tons of petrol, the government is still getting net revenues of Rs5 billion a month – CD collected minus PDC to be paid. However, the government is forgoing petroleum levy of Rs51 billion at full Rs30/liter and Rs42 billion on GST at full 17 percent. The overall forgone revenues a month are Rs93 billion on PL and GST. Add Rs18 billion of PDC in it, the total revenue potential loss of the government is Rs111 billion a month. Still government (at the above-mentioned price) is getting net revenues of Rs5 billion.

However, the equation is changing fast. The prices are moving up. And likely to stay high for the time being. The price on the last working day (inclusive of premium) was $137/barrel and $125/barrel for HSD and petrol. At this price, the forgone revenue on PL and GST is computed at Rs97 billion. The PDC is computed at Rs42 billion. The total revenue loss to the exchequer is Rs140 billion and adjusting to CD, the loss is Rs115 billion.

At this rate, the revenue loss for the government for four months (till budget) will be at Rs560 billion – around Rs390 billion on PL and GST while around Rs170 billion on PDC. The government will collect around Rs100 billion on CD and the net subsidy would be around Rs70 billion.

Seeing all these numbers, OMCs are not willing to import without having a mechanism of government paying them the PDC amount. A good chunk can be adjusted against CD being charged and rest must be paid (if prices remain high) through direct fiscal injection.

Situation is tough, as there is already a tussle going on between OMCs and banks on enhancing their financing limits. The prices have moved up and OMCs limits are exhausting. SBP is pushing banks to enhance limits. Banks are wary about the sector as they got their hands badly burnt in Hascol fiasco. And on top, the cashflow adjustments of PDC would require even higher financing. Then OMCs (even if they get financing) are reluctant to assume risk of receivables as some have pending receivables from 2008. This is all messed up. The government must come up with a swift mechanism for paying subsidies. Otherwise, there would be shortage in harvesting season which is coinciding with holy month of Ramzan.