The country is facing a severe balance of payment crisis. With drying external sources to reroll maturing debt, it is of utmost importance to preserve the remaining reserves. That must be done by restricting imports. So far, half-hearted measures have been taken in this direction — such as symbolically banning luxury goods in May 2022.
However, the real problem was not only ignored, but the crisis exacerbated after the new government failingly tried to eliminate load shedding by importing fuel at dangerously high prices. Moreover, there was a delay in passing the increase in international prices on to the consumers with a view to saving the political capital. Unfortunately, not only the crisis worsened, but the political capital eroded as well.
Oil marketing companies and refineries have built reserves of petroleum products — petrol, diesel, and furnace oil — at a time of peaking prices in dollars. Instead, it should have been time for rationing and prudence. However, the obsession of showing speed by the government, and motivation to make capital gains by oil companies and dealers have worsened the crisis. The decisions taken in May and June are hurting in July. High imports in May and June have resulted in high payments pressure in July (as payments are made with a lag of 30-60 days) resulting in massive depreciation of currency.
All these steps were taken against the will of the incumbent finance minister, and today he is being bashed by friends and foes alike for not managing the economy right. Those who are responsible for this incompetence should be held accountable. Not the finance minister whose wings have been clipped and who is barred from taking tough but much-needed decisions.
Today, stocks of diesel in the country are of 55-60 days and petrol’s for 35-40. Then there are 35 days of furnace oil stocks with OMCs (oil marketing companies) while there are additional 20-25 days stocks lying with the IPPs (Independent Power Producers). Now when the international prices are falling, the import of petroleum products and crude has declined. But the damage is already done.
Earlier, every sane analyst had insisted that the GoP should take steps towards energy demand rationing by reducing working hours of the week, promoting work from home culture, reducing petroleum consumption by increasing prices; and by doing forced load shedding. Instead, the government was adamant to increase working hours, reluctant to increase prices; and it imported LNG and oil at peaking prices to reduce load shedding. Now the chickens have come home to roost.
Some would argue that freezing of petroleum prices was done by the outgoing PTI government. Yes, it all may have very well started from the decision taken by Imran Khan in February 2022, but that price freeze remained in place till June end. By the time PTI government was ousted, the price freeze had turned into a subsidy. Nevertheless, the new government took another six weeks to start increasing prices. By that time, international petrol and diesel prices skyrocketed.
In May, everyone had expected an increase of Rs50-100/liter in diesel prices. Dealers kept on building inventories in anticipation. Since diesel is less inflammable as compared to petrol, it is also easier to store. Anyone with storage and cash started piling inventories. Seeing that, OMCs increased their import to meet demand from dealers.
Then the refineries pounced upon the opportunity to make quick bucks. The increase in petrol and diesel prices was disproportionately higher than crude oil prices. The difference was refinery margins. These margins swelled. Seeing that, refineries have imported higher amount of crude to process at peaking margins.
In the refining process, furnace oil (FO) is produced, as a by-product, by Pakistan’s dated refineries. There is no or little market of FO export. And the country’s FO reserves are building. Now with increase in hydel production (which is seasonal) and fall in demand (again seasonal), the demand for FO will fall. This may push refineries to produce less in coming months or the government must run furnace oil plants against the merit order allowing refineries to produce petrol and diesel. This will create another crisis.
As the incumbent finance minister has insisted in the past, there may not be any element of corruption. But it’s sheer incompetence on the part of both PTI and incumbent governments. On more than one occasion, the petroleum ministry demonstrated extreme lack of foresight. And the Prime Minister’s office refused to appreciate the gravity of matter at hand.
Back in summer 2020, a commission was formed when shortage of petroleum products took place, as oil companies had not imported enough in days of falling prices. Shouldn’t a commission be formed today when oil companies have imported in excess in days of growing prices? And especially, at a time, when every imported dollar counts?
Copyright Business Recorder, 2022