Ogra’s gas “bomb”

The government may notify revised consumer gas prices later today, having received the ECC nod last week. Don’t be surprised at this being termed as one of many “Ogra bomb” that it drops almost every month. Only that, this time around, the bomb analogy is not entirely out of place – and whichever way one looks at it, the price increase is mammoth.

It was as recent as October 2018 when the gas prices were revised upwards. The sensational media reporting followed, terming it as 143 percent hike, when the actual impact was no more than 22 percent in weighted average terms. Even the Pakistan Bureau of statistics (PBS) failed to put in more efforts than simply calculating the impact on simple averages and the impact was calculated as over 100 percent, later revised downwards to 81 percent.

Come July 2019, there is no hiding behind weighted averages either, as the second consumption slab with two-third share, is slated to undergo the highest increase at 235 percent year-on-year. The increase is down to 191 percent when compared with the previous increase made in October 2018, but in terms of CPI calculation, the price increase of 235 percent will be considered. The overall increase will be 144 percent year-on-year.

Even if the PBS this time around corrects itself and adopts weighted average methodology – the toll will stand at 122 percent. If expecting the PBS to deliver impacts in terms of weighted average sounds too much to expect – then surely no one is expecting them to compute the real impact, as the benefit of one previous slab will reportedly be allowed with this revision.

The government will be hoping that the PBS picks simple average formula over the weighted average one – as it records the increase to 87 percent versus that of 124 percent in case of weighted average with slab benefit. The question that really begs an answer is whether a gap of Rs34 billion is worth it to be filled with a price increase of this magnitude, which will impact the CPI to such an extent? (see: Gas price: U-turn calling & Gas prices CPI perspective, published on May 29 & 31, 2019)

The resultant increase in CPI inflation because of domestic gas price increase to cover up Rs35 billion of additional revenue (half of which is a result of previous failures to pass on), is more than any other item in the whole CPI basket. Mind you, inflation is already on the higher side, and this could mean higher interest rates, higher debt payments, and more fiscal trouble. All this for settling Rs35 billion – when half of it could have been achieved cross subsidizing or increasing price by 20 percent across all categories. Surely not worth it, and the consequences would be dearer.