Revisiting POL prices

Revisiting POL prices

September saw inflation accelerate at a faster pace as there was an unanticipated rise in fuel and food prices. Three key factors at play are a weak rupee, significantly high food import demand and increased prices of petroleum products. It is expected that the recent rise in petroleum products (POL) and liquefied petroleum gas (LPG) prices will push the consumer price index (CPI) to even higher levels.

While food price inflation at 10.2 per cent witnessed the largest increase among the various CPI categories, the other components followed closely. For example, utility charges, including electricity, gas and fuel, rose by 9.7 per cent, and transportation charges by 9.1 per cent. At a time when the government has provided a large medical cover for the citizens, the health charges still rose by 7.9 per cent.

We limit our discussion here to petroleum products (POL) prices.

Given the ongoing consultations with the International Monetary Fund (IMF) and the upward trend of global commodity prices, the federal government increased the price of petrol by Rs 4 per litre and high-speed diesel (HSD) by Rs 2 per litre at the start of October. In September as well, prices of all petroleum products witnessed an increase to accommodate the impact of higher international market rates and currency depreciation.

It is noteworthy that during 2020-21 the local POL production increased by 18 per cent. Since the Pakistan Tehreek-i-Insaf (PTI) government came into power, it has also enjoyed the cushion of receiving POL products from oil-producing countries on deferred payment. However, these measures have not been enough to accommodate the recent surge in demand from the large scale manufacturing (LSM) sector. This sector has witnessed double-digit growth during the fiscal year 2020-21. Ultimately, the economy ends up going to the international market, placing import orders at higher levels at prices that are well beyond what Pakistan’s current account can sustain.

More recently, the private sector has engaged with the Oil and Gas Regulatory Authority (OGRA) to advocate a change in POL price fixation formula as a revision on fortnightly basis ends up hurting the cost of doing business which is already under pressure due to rupee volatility, pandemic-related disruptions in supply chains and an ambitious revenue collection agenda at the FBR.

Despite the federal government’s move to keep taxes low on POL items at a time when international prices are on the rise, the manufacturing sector is not convinced as to why the changes in global oil prices are not fully reflected in nationally calculated POL prices. All the petroleum companies are regulated by the OGRA and it is equally important to revisit the margins of Oil Marketing Companies (OMCs) and dealers on a regular basis, particularly when the global oil prices are undergoing unanticipated changes.

In February, the Economic Coordination Committee had constituted a committee headed by the special assistant to prime minister on petroleum to look into revised margins. While the committee had representation from the public sector and businesses, it lacked voice from the consumer groups and organisations who play an active role in social accountability in the energy sector. It is also high time that an independent local think tank should be tasked to undertake a study on this subject and provide recommendations to the committee.

The role of revenue authorities in keeping POL prices high or uncertain also requires careful evaluation. Petrol and HSD remain major revenue earners for the government due to which only meagre relief is provided when global prices are increasing. The taxes on POL need to be in line with the peer and competitor economies at all times. It is not clear how the current formula allows for this arrangement which could greatly make Pakistan’s exports competitive abroad.

To provide comprehensive relief in power and gas prices, a complete review of national, provincial, and local taxes levied on oil, gas, electricity and petroleum products may be undertaken, and space to scale back some of these taxes explored. These measures will require consultation with the FBR and provinces before negotiating a review with the IMF. The dollarisation in the energy supply chain needs to be scaled back gradually. All future agreements in the generation, transmission and distribution should be in local currency. This also implies that an appreciation in the Pakistani rupee, as seen last year, should lend lower power sector costs.

There is also a significant difference between winter and summer demand for power. Fixed charges increase whenever there is high capacity and low demand. The demand-increasing incentives, for example, reduction in the power and gas rates in winters could be introduced. The less-than-optimal utilisation of capacity during off-peak period can be reversed through improved incentives. The industrial tariff structure should remain under review for such out-of-box solutions. To keep the longer-term costs in check, the induction of new capacity may be curtailed.

The investment requirements and stringent credit terms in the energy sector need to be rationalised. This is possible in the short term through increasing repayment period or changes to interest rates faced by the energy projects. The NEPRA will ultimately have to check the high operation and maintenance charges claimed by all power producers, including independent ones. The release of payments to independent power producers (IPPs) by the government should be linked to some of the above mentioned priorities and pro-consumer interventions.

The prime minister remains keen to review the terms and conditions set with the IMF with the objective of keeping price inflation in check. Therefore, it will be appropriate to suggest that targetted subsidies for lifeline consumers in the energy sector should continue for the medium term. However, who to target and how to target for provision of subsidy is a scientific area where the federal government and regulators require greater capacities.

The writer is an economist and a former civil servant. He tweets @vaqarahmed