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POL products: massive price rise

The federal budget for next fiscal year is yet to be passed by parliament and rumblings against the government are loud and clear. Unlike previous years, it is not the pressure groups trying to reverse proposals that would increase their input costs and/or reduce their profit margins, though they too have expressed their reservations on fiscal measures contained in the budget, but the general public that is voicing its extreme displeasure.

The reason: the government’s decision to significantly raise prices of oil and products – petrol by a massive 25.58 rupees per litre, diesel by 21.31 rupees per litre, kerosene by 23.50 rupees per litre and light diesel by 17.84 rupees per litre. This would directly impact on the ruling party’s voting base – town and city middle to lower middle class dwellers – reliant on their own or public transport, who face an erosion of their income due to a rise in their daily transport bill. This, if past precedence is anything to go by, would also jack up the price of farm produce as well as other products rendering the budget 2020-21’s projected rate of inflation of 6.5 percent even more imprecise than was considered when the budget was announced on 12 June as it was 1.5 percent lower than the International Monetary Fund’s (IMF) projection of 8 percent for next year.

The government maintains that the decision to raise domestic prices is due to the rise in the international price of oil based on the price of three cargoes of Oil Marketing Companies (OMCs), including Pakistan State Oil, that have reached Karachi port. The public is understandably linking the raise in prices effective 26 June till 31 July to petrol shortages at the pump early June, attributed to the sector’s resistance to pass on the government’s decision to reduce price of oil and products (effective 1 June) in response to lower international price of oil and products.

First off it is necessary to note that all the subsectors operating in the oil sector have a stipulated margin (over and above the imported price): ex-refinery import parity price (varies from month to month based on the import price), 3.70 rupees per litre dealer commission, 2.81 rupee per litre distributor margin (OMCs), inland freight margin 3.19 rupee per litre (also goes to OMCs but varies in different regions based on distance) and the government charges 30 rupee per litre petroleum levy and GST at the current rate of 17 percent per litre. The rupee-dollar parity would of course cut down on their margins and the rupee has been consistently losing value in recent weeks.

So what was the sequence of events that led to fuel shortages? On 25 March, Ministry of Energy directed oil companies to cancel their planned imports (April onwards) and increase their off-take from refineries so that refinery operations are maintained at an adequate level; and additionally urged refineries to enhance their storage capacity and facilitate OMCs.

On 20 May, oil refineries warned the government that the country may face fuel shortages if they decide to cut production due to cheaper imports by PSO (as a result of the decline in the international price of oil) that were leading to negative margins. Refineries further pointed out that they had already suffered inventory losses of 31 billion rupees in March attributed to global and domestic March and April lockdowns due to the pandemic, adding that any slowdown/shutdown would have negative implications including product shortages/dry outs, port constraints and a drain on the foreign exchange reserves due to import substitution.

End May the government reduced the prices of oil and products effective 1 June and on 31 May Prime Minister Imran Khan tweeted that “we have further reduced petrol, light diesel oil, kerosene oil prices. Now we have the cheapest fuel cost compared to other states in South Asia. India is almost exactly double. Bangladesh, Sri Lanka & Nepal are all 50 to 75 percent more expensive than us.”

Early June fuel shortages erupted in the country and on 9 June Ministry of Energy informed the cabinet that supplies in June 2019 were 650,000 tonnes while in June 2020 850,000 tonnes had been arranged. The problem the Minister stated was with the hoarders. On 10 June Oil and Gas Regulatory Authority (Ogra) issued show cause notices to Puma Energy, Shell Pakistan, Attock Petroleum, Hascol Petroleum, Total Parco Pakistan, and Gas and Oil Limited and subsequently claimed it had levied penalties of up to 10 million rupees.

In response to the show-cause notice, OMCs went to court and have laid the blame squarely on the Ministry of Energy by pointing out that the demand of petroleum products in the country is reviewed monthly (for the next three months) by the Product Review Meeting (PRM) led by the Ministry of Energy (Petroleum Division). After allocation to local refinery production, the balance is allowed to be imported by the PRM. The Oil Companies Advisory Committee (OCAC) recommended higher imports in May and June due to higher demand in these months, including due to the wheat harvest season, however the Ministry of Energy disregarded these suggestions (a claim at odds with the data shared in the Cabinet meeting). Umer Ayub, the Minister for Energy, insisted that hoarders were responsible and assured the court in Khyber Pukhtookhwa that he would resolve the problem in 3 days. Petrol is available today lending credence to Ayub’s contention.

The Prime Minister did not, as expected, comment through a tweet on his administration’s decision to raise rates on 25 June, effectivity the next day, instead of waiting till the end of the month, another five days as is the norm. His critics may argue that the public would like to hear his views when he takes an unpopular decision rather than when he takes a popular one; however, in this respect Imran Khan has followed the pattern set by his predecessors. Umer Ayub, however tweeted that petrol prices in Pakistan are the lowest in the region – a claim that is meaningless given that Pakistan has the lowest growth rate in the region and the highest rate of inflation; and that the rise in prices is due to the eroding rupee-dollar parity as well as a steady rise in the international price of oil. True but ignored is the fact that the consumers are paying almost double what it costs to import the commodity.

Be that as it may, the decision to raise rates from 26 June instead on from 1 July is perhaps more indicative of a desire to ensure that the revenue figures for the outgoing year are somewhat strengthened and to ensure that the budget deficit is close to 9.1 percent as projected in the budget documents. The notification of the raise indicates that there is to be no increase in the petroleum levy, this was not possible in any case as raising it by more than 30 rupees per litre requires passage by parliament, however with a raise in the price the collections under General Sales Tax would rise by 1.5 to 2 billion rupees during the last five days of the current fiscal year as it is a percentage of the price.

To conclude, one would urge the government to revisit the profits/margins over and above the import price of different subsectors in the oil sector as well as to revisit its own reliance on taxes on petroleum and products as a revenue source which requires a change in the tax system to render it more fair, equitable and non-anomalous.

ANJUM IBRAHIM, "POL products: massive price rise," Business Recorder. 2020-06-29.
Keywords: Economics , Economic issues , Federal budget , Oil marketing , Oil companies , Sales tax , Imran Khan , Pakistan , OCAC , OGRA , OMC

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