Pakistani Government Unlikely to Pass on Fuel Price Reductions to Consumers

Bullets:

• The Pakistani government may not pass on the significant reduction in international prices of diesel and petrol to consumers.

• The average price of diesel for the next fortnightly review has dropped by $7 per barrel, translating to a reduction of Rs30 per liter for domestic consumers.

• The average price of petrol has dropped to $90 per barrel, which translates into a reduction of Rs10 per liter for local consumers.

• The rupee has appreciated against the dollar, which has helped to cut the import price of diesel and petrol.

• The government is expected to partially adjust exchange losses in the upcoming review, rather than passing on the full benefit to consumers.

• The government may increase the petroleum levy on diesel to Rs50 per liter under conditions set by the IMF.

• If the government imposes GST, local consumers may not benefit from the global drop in diesel prices.

• Industry sources expect an Rs10 per liter reduction in the price of diesel for local consumers if GST is not imposed.

• The global price drop of petrol is not expected to result in a reduction in the price of petrol for local consumers.

Introduction:

The Pakistani government is unlikely to pass on the significant reduction in international prices of diesel and petrol to consumers. Industry sources suggest that the government may instead use this opportunity to adjust previous exchange losses and increase taxation on fuel. The average prices of diesel and petrol are set to be reviewed on February 28, 2023, based on the average fortnightly prices of both products.

Reduction in International Prices of Diesel and Petrol:

According to sources in the oil industry, the average price of diesel for the next fortnightly review has dropped by $7 per barrel. This translates to a reduction of Rs30 per liter for the domestic price of diesel. The average price of diesel in the global market has fallen to around $100 per barrel, compared to $107 per barrel in the previous fortnight. Meanwhile, the average price of petrol has dropped to $90 per barrel for the next review of prices, compared to $93 per barrel in the last review. This translates into a reduction of Rs10 per liter for consumers in the local market.

The rupee has also appreciated against the dollar in the last two weeks, which has helped to cut the import price of diesel and petrol. The average exchange rate dropped by Rs8 for the next review of prices.

Government's Possible Actions:

Despite these price reductions, industry sources suggest that the government is unlikely to pass on the full benefit to consumers. In previous reviews, the government has not fully passed on exchange losses to the oil sector, and it is expected to partially adjust these losses in the upcoming review. For instance, the exchange loss adjustment of Rs88 per liter was due on diesel, but the government only transferred Rs12 per liter, leaving the remaining amount still to be adjusted. Similarly, the exchange loss adjustment of Rs34 per liter was due on petrol, but the government only gave Rs12 per liter to the oil industry.

Industry sources suggest that under the conditions put down by the IMF, the government may increase the petroleum levy (PL) on diesel to Rs50 per liter, up from its current rate of Rs40 per liter. Additionally, if the government imposes GST, consumers may not benefit from the global drop in diesel prices. However, if GST is not imposed, industry sources expect an Rs10 per liter reduction in the price of diesel for local consumers.

While diesel prices are expected to see a slight reduction, industry sources do not expect any reduction in the price of petrol for local consumers. This is despite the fact that the global price of petrol has dropped by Rs10 per liter.

Summary:

In summary, while the international prices of diesel and petrol have seen significant reductions, it is unlikely that Pakistani consumers will benefit fully from these price drops. The government may use this opportunity to adjust exchange losses and increase taxation on fuel, leaving consumers to bear the brunt of these measures.