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Pakistan has a very tough economic year ahead. Petroleum prices have already increased by 40 percent, yet subsidy on petrol stands at Rs9/liter and Rs23/liter on diesel. The government must not only terminate the subsidies but also needs to impose sales tax and petroleum levy on these products. Then, the electricity prices as recommended by NEPRA shall increase the base tariff by Rs7.9/unit from existing Rs16.91 per unit (45% increases). And the gas prices are revising up too. In addition, the budget may see fresh taxes. A tsunami of inflation shall come in which despite any number fudging (as suggested by hanky-panky in recent SPI figures on wheat prices)may climb to 20 percent or more before peaking.

The government needs to reconsider its inflation management plan. The indecision of three months has cost the economy a lot. The currency has depreciated from Rs177 (28th Feb 22) to Rs198 against the USD. Market rates have shot up. The uncertainty has increased the premium on LCs issuance. Stock market performance has turned to shambles. Government’s top priority must be to manage sentiments.

The right, albeit too late, decision of petroleum prices increase has taken place. The subsidy must end by 15th June and by beginning of July fresh taxes must be imposed slowly and gradually. Then, by July end exemptions and new taxes would result in more inflation. The electricity base tariff revision may take a few months before being implemented. However, the fuel cost adjustment (FCA) is going to be around Rs8/unit (against Rs4/unit average in the past few months) in the NTDC system and around Rs10/unit in KE areas, and is going to hit the bills in July – as the FCA of May shall be applied in July. The story of August is going to be no different as fuel prices in June may see no respite.

Seeing all this, the government should work on reducing the inflation where it can. One element is to reduce the imports of expensive fuel in power generation. For example, the cost of imported coal is too high as the fuel cost alone is approaching Rs30 /unit. The government has (rightly so) asked the plants to stop import and production. That is why loadshedding has increased lately. The government must not produce power at exorbitant fuel cost to keep both inflation and imports relatively lower.

Yes, power outages are an adverse outcome. The situation could improve in July as (hopefully) monsoon season shall commence and enhance the hydel production in the mix. It may also reduce demand due to fall in temperature. In order to lower the overall load shedding, the government should impose smart lockdown by encouraging work from home regime, while closing shopping malls and commercial activities by 6 PM with weekends off.

Then on the petroleum side (whose direct and indirect inflation impact is greatest), the government needs to work on the refinery margins. The premium on petroleum products (petrol and especially diesel) has increased abnormally in the past 2-3 months due to supply shortage after Ukraine war. The gross refinery margins on HSD for local refineries which averaged at Rs14 per liter during FY17-21 was increased to Rs54/liter in April and peaked at Rs85 per liter in May before tapering to current rate at Rs70/liter. In case of petrol (MS), the spread of ex-refinery price over crude has increased from an average of Rs7.5/liter in FY17-21 to Rs57/liter currently.

Pakistan is producing around 60 percent of HSD and around 30 percent of MS locally. If the margin on HSD and MS are capped at Rs20/liter and Rs15/liter respectively, the government can find room to impose GST and PL on the current prices or reduce the prices to have zero subsidy and zero taxes. Then the government should increase the refining capacity to full to save not only on refinery margins but also to reduce the import bill. As per industry calculations, monthly forex savings would be around Rs200 million if full refinery capacity is utilized. For this to happen, SBP should sit with banks to sort out the maxed out credit limits of refineries.

This should have been done earlier. However, for almost one and half months there was no government and during the remainder half the new government was contemplating whether to stay on or go home. Precious time has been wasted. Now the government should act without any further delay. And with IMF signing up, the currency is expected to appreciate and that would further help in reducing the need for future petroleum prices raise. The government should act fast, as inflationary expectations are entrenching, and further prices hikes would shift many below the poverty line.


Comments are closed.

Imran Hameed Jun 07, 2022 05:34pm
need to develop Bus transport system to avoid lot of car's on Road - specially for schools , so a bus can pick 200 children for pick and drop - avoiding 200 odd cars / motorbicke running -
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John Wick Jun 07, 2022 09:44pm
Nothing wrong with the approach of belt tightening, however it seems IK's approach of increasing dollar input via overseas Pakistanis and getting better prices from the market.
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