Summary:
The Prime Minister has delayed the price hike in petrol as was expected earlier by 48 hours giving consumers a short relief. This decision was taken given a cut down of 3% in the prices of petrol and diesel as recommended by the Oil and Gas Regulatory Authority (Ogra) about the previous period. Prices of petrol are now at their second-best levels after 16 months of records.
Details:
In the past, year the petroleum levy has been constant at Rs60 per liter for compliance with the requirements of a previous IMF program. The PL has recently been increased to a maximum of Rs70 per liter down from the earlier proposed Rs80 per liter for June 2024. Still, and as we shall see next, the government has deliberately decided not to increase the PL above Rs60 per liter in the last four pricing cycles.
This is important because the federal government has budgeted a 47% year-on-year growth of PL revenues this year with a target of Rs 1. 289 trillion by the end of the fiscal year 2025 (FY25). To realize this target, the sale of petrol and diesel would require an increase of 34% relative to last year and such a rate of consumption is definitely out of the realm of possibility in the global market. The overall sales of petrol and diesel stood at 18. 3 billion liters in FY18 and if a growth rate has to be achieved to meet the target set for FY25, then the demand boost could be as high as 19%.
Another option for the government is a mere raise of the PL to the new maximum of Rs70 per liter. Should such a higher levy be implemented throughout the year, it can assist in achieving the revenue goal with the precondition of fuel utilization augmentation by 14% in contrast to the previous year. However, the government has already lost nearly Rs30 billion in the potential sources of PL in the past two months by not raising it.
At the same time, it appears that the government has saved its most ambitious reforms for after the terms of the new program with the IMF are agreed. However, failure to meet the PL revenue target indeed means reducing the PSDP even more, which has been trimmed to include subsidies for the power sector in the first place.