Prime Minister Imran Khan on Friday rejected an increase in the prices of petroleum products, passing on this burden to the upcoming government.
The Petroleum Division had tabled a proposal of increasing oil prices to do away with the price differential claims that had been going up.
The issue was taken up during a cabinet meeting. However, the summary was rejected.
The other proposal was that the government might maintain the current zero rate of general sales tax and petroleum levy on petroleum products.
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The issue was taken up before Prime Minister Imran Khan. However, the premier refused to approve the increase in oil prices and maintained his decision of freezing the rates till the next budget.
He said the next government would deal with the issue of oil pricing.
The premier had announced a relief package on February 28, 2022.
The package included a reduction in the consumer prices of motor spirit and high-speed diesel (HSD) by Rs10 per litre and a commitment to keep the prices stable till the end of the fiscal year.
The decision was implemented through the approval of the proposal of Finance Division through a summary on the prices of petroleum products.
The decision included payment of subsidy to oil marketing companies (OMCs) and refineries in the form of price differential claims. Subsequently, an allocation of Rs20 billion and Rs11.73 billion for reimbursement of price differential claims to OMCs and refineries (for the period of November 1 to 4, 2021 and March 1 to 31, 2022) through a supplementary grant was approved by the Economic Coordination Committee (ECC) on March 7 and 15. These decisions were ratified by the federal cabinet.
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As per Oil and Gas Regulatory Authority’s (OGRA) assessment, this allocated amount would be sufficient for the reimbursement of price differential claims for period of March 19 to 31, 2022. OGRA has subsequently informed that due to continuously rising trend of oil prices in the international market, the price differential claims for the first fortnight of April 2022 is projected at Rs26.47 billion. Based on these price differential claims for the whole month of April 2022, the amount is estimated to be around Rs53-Rs55 billion.
Therefore, the Petroleum Division moved a summary to the ECC on April 1, 2022 that an additional Rs55 billion might be allocated through a supplementary grant for the disbursement of price differential claims to the OMCs and refineries for the month of April 2022. The matter has not been considered by the ECC yet.
The international energy markets remain volatile and the premiums on motor sprit and HSD remain high. Therefore, the liquidity of OMCs and refineries is under stress. The subsidised prices of petroleum products add to this stress because the full cost recovery is made only when price differential claims are processed after a lag of almost a month.
The availability of petroleum products in the country might be affected because of this stress. Oil Marketing Companies Advisory Council (OCAC) has expressed their concerns about the situation through a letter and OGRA has also expressed similar concerns.
If the energy markets remain in their present situation, the estimated amount of price differential claims for the period between April 16, 2022 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 yet to be allocated amount of Rs26.47 billion for the first fortnight of April.
These amounts have to be allocated promptly and need to be processed expeditiously to maintain the liquidity of OMCs and refineries so that the supply chains remain intact.
The demand of motor spirit and HSD in the country remains very high. This high demand is not only making the petroleum market vulnerable to supply disruptions and placing a very heavy burden on the liquidity in the sector, but is also increasing the import bill to a very high level.
In order to curtail the demand, the best way forward is to correct the price signals immediately by adjusting the prices of petroleum products based on full cost recovery model.
In view of this situation, the Petroleum Division submitted proposals that prices for petroleum products as determined by OGRA might be passed on to the consumers and the practice of incurring a subsidy may be done away with immediately.
Secondly, to protect the consumers, the current rates of petroleum levy and sales tax on petroleum products of 0% may be maintained. However, the prime minister did not approve it.
The OCAC in a letter to Petroleum Division said that the situation remained complex and stressful with the price differential claims continuing to increase due to the increasing oil prices on the back of the Ukraine situation and the rising US dollar.
Although an amount Rs11.73 billion was allocated and approved for price differential claims of March 16-31, 2022, but the amount is yet to be transferred to the assigned account managed by the Pakistan State Oil (PSO).
Due to further increase in prices of petroleum products internationally, the amount of price differential claims is estimated at Rs34 billion for the period April 1-15, 2022. However, the approval for this amount by the competent authority has not been initiated.
A decision and clarity on this amount is required to ensure the industry imports remain on track and the country is kept supplied.
Despite the approval of the reimbursement procedure from the ECC and ratification by the cabinet, a requirement for review and validation by the Accountant General of Pakistan Revenues (AGPR) has been added in the process.
This delays the reimbursement process -- which is now putting additional pressure on an already stretched financial position of the marketing companies.
The industry’s proposal to benchmark premium on HSD imports to PSO's latest tender has been approved by the ECC, however not ratified by the cabinet. The difference between the current announced premium and the market is a huge Rs6.96 per litre on the import of HSD.
With the HSD season approaching, this anomaly needs an immediate resolution. This will be an approximate 5% increase for the consumer -- not significant compared to the risk this represents to the country's supply security.
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