Energy sector is the biggest concern for the newly formed government. The commodity prices are in a super cycle. Energy imports are straining the current account deficit and the gap between cost and price (recovery) is adding to the fiscal deficit. There are no easy solutions.
The thorny issue with the IMF is of petroleum subsidy. The subsidy is running at a rate of about Rs2 billion per day and the subsidy in ongoing till the start of March. As per the last OGRA price recommendations, the subsidy is Rs21.3/liter on petrol and Rs51.2/liter on HSD. This increase is necessary to abolish the subsidy with no tax (GST or Petroleum levy).
The consumer price of both products in Pakistan is almost same today (Rs149.9 for petrol and Rs144.6 for diesel). Higher increase in diesel is required due to higher premium and higher FOB price in the international market nowadays. Pakistan can create a balance in both petroleum products pricing by having higher than required increase in petrol and lower than required increase in HSD.
Assuming that both products are equally consumed (not far from reality – in last 12 months petrol consumption was 12.4bn liter versus diesel consumption of 10.5bn liters), roughly Rs35 per liter increase in prices of both fuels would net off the subsidy. The government can ask OMCs to use PL on petrol (due to higher increase) to balance the subsidy on diesel. This can largely work out without using any additional fiscal resource.
Why this approach? Well, that is to lower the higher indirect inflationary impact of diesel. The direct inflation impact of petrol is perhaps a little higher (due to a little higher consumption); but its indirect impact is relatively lower.
Petrol is used mainly in private vehicles – cars and 2/3 wheelers, with minimal industrial use. According to calculations done by an energy expert a few years back the consumption of petrol was 55-58 percent in 2/3 wheelers. However, sources close to government claim that petrol consumption is around 65-70 percent in cars. There are no official estimates – let’s assume that 50 percent is being used in cars while the rest in 2/3 wheelers.
There could be some indirect impact of inflation in petrol as last mile delivery and some intra-city goods transportation relies on vehicles running on petrol.
Diesel prime consumption is in transportation as well; but around 12 percent is industrial and power sector usage. Then within transport, the usage in private vehicles is lower (only in SUVs and all), whereas it’s the prime fuel for inter-city buses, trucks, and other transport use. Increase in HSD leads to increase in transport fares (mainly used by low- and middle-income classes) and the bigger worry is increase in price of goods due to higher transportation cost – especially in food items. Historically, food inflation and fuel inflation moved in tandem. That is a bigger concern.
Then the wheat harvesting season is ongoing. The usage peaks between mid-April to mid-May due to wheat harvesting. Last year in April, diesel consumption was slightly higher than petrol and was 90 percent of petrol in May. This year, the numbers would not be different. This is the peak diesel season in agriculture and higher prices would have an impact on grain prices and in turn many other agriculture (food) products.
That is why the need is to keep the inflationary impact due to HSD in check as compared to petrol. That doesn’t intend to undermine the impact of inflation due to petrol price increase. But in days of economic and energy emergency, it’s more important to protect the larger inflation impact on masses as much as it is possible.