The government’s decision to maintain petrol prices on Oct. 15 caught consumers off guard, especially as many hoped the rupee’s dramatic recovery against the US dollar would help bring retail prices further down. While it’s a bummer from a consumer perspective, the increase in the Petroleum Development Levy on petrol is good for markets.
Apparently, it came down to the International Monetary Fund versus Ishaq Dar on the PDL. The finance minister reduced petroleum prices starting Oct. 1 and later claimed he would handle any potential reservations by the lender. The IMF’s resident representative in Islamabad, Esther Perez Ruiz, said that commitments made by the government continued to apply.
The Finance Ministry said Oct. 15 it was maintaining petroleum prices to provide “utmost relief” to the people of Pakistan. Fahad Rauf, head of equity research at Ismail Iqbal Securities, told ProPakistani:
It is a very surprising move, given Ishaq Dar’s stance on petroleum prices. However, it is a good decision for the economy as targeted subsidies should take preference over blanket subsidies.
While the cost of importing petrol slumped more than 14%, the PDL was boosted by 14.8% to Rs. 47.26 per liter, according to the Oil and Gas Regulatory Authority. PDL on high speed diesel was lowered to Rs. 7.14 on Oct. 16 from Rs. 12.58 Oct. 1 , according to Arif Habib.
Umair Naseer, director research at Topline Securities, said changes to PDL should be looked at holistically as “annual sales of petrol/diesel is almost similar.”
“Since, we are in an IMF program and we have serious (Balance of Payments) issues, we do not have much options.”
The domestic currency has recovered Rs. 21.68 against the USD from Sept. 23 through Oct. 10 while Brent crude futures’ remain lower than levels seen four months ago. Those factors had triggered optimism among consumers regarding the government’s ability in passing on relief to people. Dar said in a video posted on his twitter account on Oct. 15 that OGRA had proposed a slight reduction in the petrol price and increases in diesel, kerosene oil and light speed diesel prices.
How is Higher PDL Reassuring for Markets?
Earlier this year, Pakistan managed to revive an IMF bailout program after a prolonged back and forth on reversing prior subsidies that the lender argued violated its terms. Fulfilling policy commitments is of paramount importance so as to ensure that that the program doesn’t go off the track.
Jihad Azour, director of Middle East and Central Asia department at IMF, said two days before the Finance Ministry decided to maintain petroleum products’ prices:
“We are encouraging Pakistan as well as also other countries to move from an untargeted subsidy that is a waste of resources and to dedicate those resources to those who need it.”
Rauf said the IMF and World Bank have been asking for the removal of blanket subsidies. Both Rauf and Naseer said higher PDL on petrol gives confidence to markets that the government wants the IMF program to remain on track.
Real Test Ahead
The IMF expects Pakistan to report Rs. 17 trillion in revenue by fiscal 2026/27 from an estimated Rs. 10.37 trillion this year. Majority of that is comprised of tax revenue, which suggests Dar’s got a tough job at hand.
Naseer said that coming up with measures to achieve revenue targets would be a key test for Dar, especially as recent floods and subsidy for exporters could have fiscal implications.
IMF’s mission would head to Pakistan in November to start preparing for the next review. Azour hinted last week that the fund could update its numbers following flood damage assessments from the World Bank and United Nations Development Program.
The government doesn’t charge sales tax on either petrol or diesel yet. However, Rauf said “IMF might extend some relaxation on that front for (the) time being.”
What’s Next?
The goal for Pakistan, as agreed with the IMF, is to raise the PDL to Rs. 50 per liter by January 2023 for petrol and by April 2023 for diesel. We are almost there in terms of petrol PDL, which suggests officials may soon jack up diesel levy.
Naseer concluded:
“We may see an increase in diesel prices going forward.”
