Daily Times

Industry analysts said recent gas price hike is expected to have a negative impact on the market by increasing the cost of doing business and inflationary pressure in Pakistan.

“The price hike will add on to the inflationary pressures in the economy, where Consumer Price Index (CPI) for two months of Fiscal Year 2018-19 (FY19) stood at 5.84 percent Year on Year (YoY), while our estimates suggest that the figure could touch close to 7 percent for FY19”, said a Research analyst at JS Research.

An analyst at IGI Research said the said revision in gas price will have inflationary impact, whereby raising our initial inflation estimates by 150-200bps to 7.5-8.5 percent, while fiscal benefits remain limited.

He said textiles sector will continue to enjoy old rates and proposal in place to provide sector with subsidize RLNG. Fertilizer sector is most affected through this decision, followed by chemicals. Cements and steels to remain relatively immune.

Commenting on impact of domestic consumers, he said gas prices accounts for 1.58 percent of total consumer basket hence a +39 percent effective increase in gas tariff for domestic consumer will have negligible direct impact on overall price basket. However he expects second round effects of gas prices in wake of rising input costs.

“With this rate hike we expect inflation to jack up by 150-200bps to +7.5-8.5%, as we incorporate an expected rise. Lower income group with limited disposal income is more sensitive to changes in cost of input and in particularly changes in gas prices. From fiscal side the government expects this move is likely to reduce companies shortfall by Rs 94 billion, which with an expected Rs 38.5 trillion size economy in FY19 translates into a 25bps fiscal saving” he added.

Last week, Economic Coordination Committee (ECC) approved structural increases in gas prices across all sectors. For domestic consumers, the imposition of tariff changes has been spread out over six slabs (previously three) keeping a progressive approach based on consumption. Rate hikes for domestic consumers range between 10 percent and 143 percent. Rate hikes for domestic consumers are significantly lower than those announced earlier this month, where the domestic sector was to take a hit of 26-180 percent, while the percentage increase to be applicable was higher for lower consumption slabs (i.e. typically lower income consumers).

The ‘low-income class’ – defined as falling within consumption of up to 100m3 (66% of the total) – is also a major consumer of Liquefied Petroleum Gas (LPG), and will also benefit from the reduction in prices by around Rs200 per cylinder of LPG.

The latest policy transfers a significant portion of the burden to industrial and commercial sectors, where for the former the tariff increase is within a range of 30-57% (previously 26-27%), while for the latter the rate hike is 40% (previously 26%).

Export oriented (zero-rated) sectors such as textile, leather, carpets, and sports and surgical goods have been exempt these increments and will be categorized separately.

Published in Daily Times, September 23^rd 2018.