POL price differential: World Bank concerned at non-payment to OMCs

The World Bank has shown concern over non-budgetary allocations for oil marketing companies and have demanded of the government to put an end to this policy to remove distortion in economic policies.
The government owes Rs 25 billion to oil marketing companies (OMCs) as differential in prices, which is growing fast due to jacking up of oil prices over the past many months.
Sources said that OMCs have been consistently demanding payment of price differential, but their calls have gone unheeded. The World Bank said the prices of petroleum products had been frozen since long against the basic theme of linking them to international prices through a passthrough formula. It said that in order to limit the consequences of rapidly increasing prices to the economy, the government gradually reduced taxation of petroleum products as such that they were virtually eliminated.
It said that combination of price freeze and exhaustion of all taxes forced OMCs to sell products below recognised costs. The World Bank does not see dipping down of the prices in the international market and apprehend that accumulated differential could increase further to create severe cash flow problems to the OMCs.
The World Bank said that as long as the government controls petroleum product prices, it should strive to simulate what would happen in a competitive market where supply and demand considerations determined outcomes. It said that due to multiplicity of social and other objectives, the prices in Pakistan are considerably distorted.
The oil prices across Pakistan are equalised through a freight equalisation margin applicable to 29 main depots. The fund is administered by the industry on behalf of the government. The World Bank said the policy of not passing on real international prices was questionable from economic standpoint and the government of Pakistan should have realistic approach to avoid more distortions in its economic policies.