The subsidy on diesel is growing. And so is the consumption (on papers). National sale of high-speed diesel (HSD) stood at the highest ever number of 919k tons (1.1 bn liters) in April 2022. The previous highest was 900K tons in June 2016. At that time, there was consumption in small generators too due to loadshedding. The consumption in April-22 is 27 percent higher than the average monthly consumption of last 12 months. Yes, there is seasonal demand due to wheat harvesting; but no way the country can consume 919K tons in a month. There is something wrong somewhere.
The answer is in pricing. The government has allowed massive subsidy on HSD – Rs41.4/liter in first two weeks and 28 percent and R51.5 /liter in the second half. The price is anticipated to increase anytime and seeing that hoarding is increasing. Since HSD is not as inflammable as petrol, its storage is relatively easier. And people are hoarding it like anything.
Then there is another problem. Pakistan’s borders are porous, and whenever, any commodity is at cheap discount to international prices, there is a case for outward smuggling. The country has seen this in wheat, sugar and lately in urea. Now it’s happening in HSD. Truckers coming from Afghanistan with empty tank and are refilled In Pakistan and just go and sell it back in Kabul/Kandahar to make a quick buck.
Then there could be a case of reverse smuggling to Iran. It’s a known fact that Iranian fuel is being smuggled to Pakistan, as it is a bit cheap with no taxes. Now HSD has no tax and with the amount of subsidy its prices is even at discount to Iran.
Thus, the subsidy is merely not giving relief to the people of Pakistan; but also, an opportunity to make quick bucks for smugglers and hoarders from across the borders. Not to mention, the economic cost of not increasing prices by not having IMF on board is huge.
The subsidy amount has increased to 35 percent and Rs73/liter in first half of May and the number is even higher in the second half. Expect similar sales numbersfor May. Pakistan is losing foreign reserves fast. The government is trying to ban non-essential imports while completely ignoring the elephant in the room. The import bill shall remain high due to higher import of subsidized fuel.
The government should lower the quantum of subsidy as soon as possible. And the other step required is to reduce the margins of the local refineries. The premium of HSD on crude is at exuberantly high level, and higher production of HSD in Pakistan is by local refineries. Usually, the number is around 65 percent and that has now reduced to 54 percent due to higher sales (and less refineries production)
The premium of HSD to crude averaged at $9.8/barrel in the last ten years is now at $37.5/barrel. That is too high a number and refineries are making a killing even after adjusting for higher crude premium on imports and high sea freight. The government should squeeze the margins of local refineries to lower the subsidy element and rest should be passed on. Otherwise, refineries, hoarders and smugglers will make money and the so-called benefit to people of Pakistan shall evaporate in terms of currency depreciation.