When the former Prime Minister Imran Khan froze the petroleum prices in Pakistan, apparently to upgrade his popularity graph, which had been going down because of the inflationary trend that ever since PTI’s government had maintained an upward trajectory, the entire opposition condoned the step and called it detrimental for the economy. However, now when the dice favour the opposition parties—they are in power—the decision to subsidize petroleum products has been left unchanged. Again the government is playing a political card to keep the sentiments of the people on their side, especially when a large swathe of the population has jumped the fences to side with Imran, who they believe had been conspiratorially removed from power.
Knowing that the relief package was consequential and is making the situation worse because of the surging crude prices internationally, the government’s decision to keep it unchanged is akin to digging a deeper hole for the economy to fall into once the IMF is on board again for the negotiation of another tranche. With that, there will be a surge in petroleum product prices. By that time, however, inflation will have hit back with more force.
Such policies are in no way people-oriented. In fact, such policies eventually deplete the people’s resources, especially the so-called Gharib Awam (Poor people). How? By creating a higher debt burden, which eventually will be recovered from the same people through extra taxes or levies.
So, what is the way out, and where does the remedy lies for this anomaly?
First, let us look at the impact of the relief package.
Unless we come out of the financial dependence and the self-imposed model of low tax collection, we cannot have our cake and eat it too.
We are in the harvesting season. The daily consumption of diesel is roughly around 34 million litres per day. So when we are subsidizing diesel, the government is taking the hit of $10 million per day. Similarly, the hit the exchequer is bearing on petrol subsidy comes to $17 million a day.
Now let us look at another scenario.
The oil marketing companies (OMC) receive price differential claims (PDC) from the government. In other words, the government is buying from the OMC at the market rate and not at the rate the former is selling to the people. Therefore according to the estimate of the Petroleum Division, the PDC amount payable to the OMC for the period April 16 to June 30, 2022, would be Rs136 billion. This is in addition to the already allocated amount of Rs31.73 billion for March 2022 and Rs26.47 billion for the first fortnight of April.
If the government fails to pay the PDC in time, there can be supply chain disruptions causing an oil shortage in the country, which will not only put a severe dent in the reputation of the new government but will also put the burden on the exchequer as the petroleum division would have to buy expensive oil to keep the tap running.
The already cash-starved OMC can bear delayed payments to a certain extent. The rising circular debt, which the government has added unnecessarily by freezing the oil price, can plunge the petroleum sector into a new pit of depleted foreign reserves.
Efficient economies link the prices of goods and services to the cost incurred in buying them. When the underlying cost rises, the local market prices are also jacked up as they do in terms of crude oil internationally. In a country stung by insufficient tax collection and low productivity, making such luxurious policies can be anything but prudent.
There are multiple solutions to reform the petroleum sector and bring oil and gas prices to a manageable level.
One, the government should start sourcing spot and cheaper cargo, including LNG, which is short in Pakistan. Two, the concept of fuel card rationing should be introduced without delay to limit the use of oil and to provide cheaper oil to the poor while taking full cost from the rich. Fuel rationing is the only way we could control the rising temper of the people when the prices of petrol will inevitably rise, according to the OGRA summary, to Rs 80 per litre.
The new government’s economic team should formulate these reforms sooner than later to upturn the economic fallout and save the OMC from becoming unprofitable because of delayed PDCs and other scheduled payments.
The slogan of independent foreign policy sounds beautiful; however, mere dreams cannot take us to this high pitch of human endeavour. Unless we come out of the financial dependence and the self-imposed model of low tax collection, we cannot have our cake and eat it too.
The petroleum policy is at the root of any successful political model. So let us be prudent in this area first.
The writer is an expert in the petroleum and energy sector and has a wide range of experience in international trading. He tweets @AhmadWaqar01.