Analysts foresee massive rise in petrol, diesel prices next year

KARACHI: Analysts foresee a hefty price escalation of Rs20/litre to Rs25/litre in the retail prices of the motor spirit and high-speed diesel next year due to the present government’s ambitious target of Rs610 million Petroleum Development Levy (PDL) in FY22.

“The targeted Rs610 billion in PDL collection roughly estimates to Rs30/litre on the sale of POL [petroleum oil lubricants] products,” an analyst at KASB Securities said.

Ali Zaidi at JS Global Capital said that the rise in POL prices would definitely feed into inflation while the impact of such a drastic rise in the prices might also hamper [the] overall demand. “The government had already started to pass on the impact of rising oil prices in the latest price revision.”

The ambitious target, which is substantially higher than Rs450 billion budgeted for FY2020/21, is also the single largest source of non-tax revenue after the State Bank of Pakistan (SBP) profits.

Zuhair Abbasi, an analyst at Business Recorder, tweeted: “For once petroleum price policy makes sense, it ties in with the growth and inflation control plans. Raising PDL at this juncture is counter-productive.”

Crude oil prices are hovering around $70/bbl-mark in the international market. And with the vaccination drives against Covid-19 in full swing across the globe, things seem to have slowly started to return to normal where oil prices are not expected to re-exhibit the volatility seen this year.

“For instance, witnessing an oil price crash of the likes of April 2020 seem a far-fetched idea, at least in the foreseeable future,” Zaidi added.

“Considering that the PDL had already fallen well below the IMF’s floor of Rs15/litre as it was reduced to Rs2.97/litre on MS [motor spirit]and less than Rs5/litre on HSD [high-speed diesel], we believe that the government will have to take some unpopular decisions in the coming year to meet the set target.”

Despite recent higher inflation, where 75 per cent of it had been driven broadly by a handful of food items, the State Bank of Pakistan’s (SBP) inflation target for the medium-term remains unchanged in the range of 5 per cent and 7 per cent.

Given that the overall revenue targets were already quite stretched, if the government fails to achieve the PDL target, it may have to rely on debt financing to cover the shortfall. A more likely result of missing the target would be a cut in the Public Sector Development Programme (PSDP) to balance the equation. Such consequences would undoubtedly stand as major challenges for a government looking to catalyse growth.

MS and HSD are two major products that generate most of the revenue for the government because of their massive and yet growing consumption. Average monthly sales of petrol and diesel are touching 700,000 tonnes and 600,000 tonnes, respectively. While the demand for kerosene and light diesel oil (LDO) stand less than 11,000 and 2,000 tonnes.

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