The minister for Petroleum and Natural Resources, Shahid Khaqan Abbasi, announced an increase of up to 38.5 percent in domestic gas prices and a cut of 3 rupee per litre in petrol/diesel prices.
Economists would, no doubt, support the trend though there would be arguments on the actual rate rise/decline announced by the minister and notified by Oil and Gas Regulatory Authority (Ogra).
While the general public may well lament the rise in gas prices, with special reference to the price of CNG, and base their argument on the low cost of domestic gas extraction/supply relative to imported fuels yet this viewpoint ignores two economic factors.
First and foremost, economists are agreed that all types of fuel in an economy must be priced equally and according to their calorific value (British thermal unit) or any other approved measure of unit of energy per unit of each fuel. Any discrepancy in price between domestic gas and other fuels raises the demand of the cheaper fuel thereby generating shortages which other more expensive fuels would have to meet.
Gas shortages in Pakistan are now a permanent feature throughout the year and the government has been struggling to price it at par with the prices of the more expensive imported fuels.
Secondly, the federal government’s levy of Gas Infrastructure Development Cess (GIDC) is under litigation and the International Monetary Fund (IMF), in its mandatory quarterly staff reviews, has expressed concerns over the loss of the projected revenue from this levy.
This may well have been the rationale behind the decision to raise gas prices besides the need to reduce the amount of subsidy that exists for gas supply to certain sections of consumers.
What is unique to Pakistan and reflects poor policies and management of the sector is the heavy reliance of our government on petroleum and its products as a revenue source. According to the recent admission by the Federal Finance Minister, Ishaq Dar, on the floor of the House the government relies in excess of 20 percent on taxes on fuel and products as a source of total revenue.
It is this particular aspect of pricing that has been the subject matter of considerable criticism of the incumbent government.
During the tenure of the PPP-led coalition government (2008-13), POL prices in the international market were high and total sales tax collections, a percentage of the price, were as per budgetary estimates and therefore not a source of concern.
However, during the tenure of the incumbent government international POL prices have been constantly on the decline and Ishaq Dar has been compelled to raise taxes on POL products with the objective of meeting the over-ambitious revenue targets that the Pakistan team agreed to under the 6.64 billion dollars Extended Fund Facility with the IMF.
This factor alone may be responsible for the recent raise in sales tax on POL products – from 20 to 25.5 percent on motor spirit, 17 to 24 percent on HOBC, 20 to 30 percent on kerosene, 36.5 to 45 percent on high speed diesel, and 20 to 29.5 percent on light diesel fuel.
No doubt the Finance Ministry argued that the public would not protest against the higher sales tax principally because the government would be reducing the price of POL, although not by as much as the price decline in the international market. Pricing of POL products in a country like ours, particularly when prices in the international market are declining, is tricky.
Not only there is a heavy reliance for revenue on POL products but also there is an imperative to closely monitor the prices of POL across our borders. For, if the price across the border is significantly higher than ours it would be smuggled to the neighbouring region resulting in a significant increase in POL imports.
In other words, because of the porosity of our borders it suits the government of the day to keep the prices higher than those in the international market to serve the dual purpose, namely: higher revenue and insurance against smuggling of POL products out of the country.
However, such self-serving logic has its own limitations. POL products are a major input for productive sectors and a price that is higher or lower than prevalent in regional countries may not only negatively impact on our export earnings as our products may be priced out of the international market place but may also result in losing a market share that is not easy to recoup.
The new gas tariff (67% increase) for urea produced on old plants now equates it with international price of LNG – if Gas Infrastructure Development Cess (GIDC) is added on.
Pakistani farmers’ profitability is already under pressure. Some methodology needs to be worked out for giving cash subsidy directly to the marginalized farmers or else they will economically die which the nation can ill-afford.