Interim government grapples with looming ‘fuel shock’

ISLAMABAD: The interim government is grappling with the impacts of the recent hike in electricity prices that has led to nationwide protests, and now, there’s a looming concern regarding the possibility of fuel prices going up dramatically this week.

According to Dawn.com, this could result in all fuel products surging beyond PKR300 per litre.

The reports said that as the caretaker administration continues deliberating solutions for the third consecutive day, attempts to alleviate the concerns of the protesting public have yielded no positive outcome.

As per the media reports, forecasts indicated that the prices of key petroleum products, such as petrol and high-speed diesel might increase by approximately PKR9-10 per litre and PKR18-20 per litre respectively on August 31. Furthermore, kerosene prices could experience an increase of around PKR13 per litre, as reported by Dawn.

The reports said that the estimations stem from current tax rates and import parity prices, predominantly influenced by currency depreciation and a slight uptick in international oil prices.

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However, insights from discussions with pertinent officials revealed that the government has limited avenues to offer permanent relief in electricity prices. The proposed strategies involved spreading bill payments over several months or adjusting bill recoveries during the winter season when energy consumption drops significantly.

Although these options maintained revenue neutrality, they could potentially result in cash flow difficulties for power companies over a few months.

The reports said that in a bid to mitigate the impact, the government has requested the power regulator to spread out the implementation of an additional PKR5.40 per unit quarterly tariff adjustment over six winter, starting in October, instead of the permissible three months.

Meanwhile, the predominant cause of the current price shock has been attributed to currency depreciation, accounting for nearly 70 per cent, which the government has little control over given the constraints of the International Monetary Fund (IMF) programme.

Whereas, an additional 10-12 per cent escalation has been due to interest rate hikes, and both the government and the State Bank of Pakistan (SBP) find themselves constrained by the IMF programme while being urged to tighten monetary policies further.

Furthermore, the reports indicated that the proposals were presented by the power division to the Prime Minister’s Office, along with other suggestions that included financial implications. However, these proposals, which could impact the IMF programme, were not supported by the finance ministry.

For instance, the Federal Board of Revenue benefited directly from high energy costs as its 18 per cent take automatically rose with price hikes, significantly impacting the tax target of over PKR9.2 trillion.

The power division also suggested reverting to a single-slab benefit for residential consumers, as was the norm until last year. However, this was withdrawn under the IMF programme due to the substantial financial implications linked to circular debt. Similarly, recommendations to reduce sales tax rates or eliminate other taxes like income tax and surcharges were ruled out, as they were introduced as part of the IMF programme.

Dawn reported that given the limitations, the caretaker government’s options appear to be limited to suspending television and radio taxes, which are relatively insignificant. It’s important to note that the government is obligated to provide quarterly data on performance related to recoveries and circular debt changes under the ongoing Stand-By Arrangement (SBA) with the IMF. The IMF checks the data on a set schedule, so there cannot be any delays.

Due to these challenges, proposals concerning benefits and tax relief are expected to be referred to the finance ministry before formal discussions during the upcoming federal cabinet meeting. However, there is no formal proposal for tariff reduction on the table at this time.