From August 1, the GoP (government of Pakistan) has reduced gasoline’s price by Rs 3.05 to Rs 227.19/litre.
However, diesel’s price been increased by Rs 8.95/litre with the new price being Rs 244.95/litre. PLD (petroleum development levy) on gasoline has been increased from Rs 10 to Rs 20/litre; while on diesel, it has been increased from Re 0 to Rs 10.0/litre. No GST has been charged.
A highly volatile Rupee-USD exchange rate makes analyses or comparisons very difficult. Pricing has been made on a weighted average of the exchange rate of the last fortnight at Rs 225.9 while the earlier prices were based on a lower exchange rate of Rs 210.
In this period, international prices of both gasoline and diesel have come down; 15 days average price for gasoline came down from 121 USD/barrel to 103 USD/barrel (15% down) and diesel’s came down from 149 USD/barrel to 132 USD/barrel(11.4% down).
Under the IMF (International Monetary Fund) agreement, the GoP has to increase PLD gradually to Rs 50 per litre. Soon, another Rs 10 may have to be added in this respect. If the oil prices do not go down and exchange rate does not stabilize at reasonable level of Rs 210, another increase would not be unavoidable.
The GoP has still some space available in the form of customs duty that it levies at the rate of around Rs 23-25 per litre. There is some confusion about customs duty and its purpose. Is it to generate revenues or to support local refineries? There used to be deemed duties, which have perhaps been eliminated.
Petroleum pricing in Pakistan is done on the basis of landing prices of PSO (Pakistan State Oil), which tenders its procurements regularly. Recently, high premiums are being charged by suppliers, which may partly be influenced by low PSO risk rating.
One does not understand why there is customs duty on gasoline imports from China? It should be otherwise. China has been benefiting from low priced supplies from Russia and Iran. Some JVs (joint ventures) with Chinese oil companies may enable us to get lower prices and premiums-hopefully. There are procurement and logistics inefficiencies as well which, if removed, may help reduce petroleum prices. However, the dichotomy is that any improvement in PSO efficiency hurts local refineries.
New petroleum products’ prices in Bangladesh have come as a bombshell in the region: petrol’s price has been increased by 45% and diesel’s and kerosene’s by 41.7%. Petrol’s price in Bangladesh is now 1.366 USD/litre as opposed to 0.961 USD/litre in Pakistan; and diesel’s is 1.198 USD/litre as opposed to 0.98 USD/litre in Pakistan.
This is despite a significant reduction in Brent prices. However, heavy exchange rate reduction has influenced affordability in Pakistan.
Petroleum prices in Bangladesh--after the new hike--are almost comparable with those in India. Earlier, there was not much difference between gasoline prices in Pakistan and Bangladesh. Bangladesh is facing similar or identical difficulties despite a less acute current account deficit issue. Bangladesh had been keeping oil prices lower in order to be competitive in exports in the region. It, too, has gone to the IMF but is in a better position than us.
However, in India, gasoline prices are 37.5% higher than those in Pakistan. In India, prices are deregulated and there is mildly heavy taxation, still much lower than those in Europe. Also, there is both Federal Excise tax and State VAT in India.
In Pakistan, IFEM is charged to average the transport cost and keep the prices uniform throughout the country, except for some minor differences. In India, there is wide variation among states due to VAT and transportation costs. In New Delhi, prices are the lowest these days: gasoline’s price in Mumbai is available at IRs 111.3/litre as opposed to IRs 96.0/litre in India’s capital. Diesel’s prices vary as well.
On the average, these days, taxation in India is 40-42% of the selling price as opposed to 12-13% in Pakistan, partly because of not charging GST. If the IMF requirements are met ultimately and GST is charged, there will be no difference between the taxation levels of Pakistan and India. If taxation and selling expenses are removed, gasoline base prices in Pakistan are 23.9% higher than those in India while diesel’s prices are 11% higher.
This is, however, a back-of the-envelope estimate. India has a very large oil refining industry; it exports petroleum products despite meeting a huge domestic demand. It only imports crude oil.
However, Pakistan has a small refinery sector catering for some 40% of the local requirement, while the rest is imported. Pakistan draws upon equally or more competitive and efficient world oil refineries than those situated in India. Pakistan’s base prices should not be higher.
Higher international oil prices and a falling Rupee have adversely impacted Pakistan’s economy, causing heavy inflation as almost anything is oil dependent. It is hoped that international oil prices would keep coming down, and if the exchange rate is brought to a reasonable level, our difficulties may be contained in this respect. Hopefully, with the IMF agreement, this would be achieved.
Copyright Business Recorder, 2022