In a bid to bridge a shortfall in revenue, the government of Pakistan has decided to increase the rate of the petroleum development levy (PDL) during the upcoming two months, which will result in the price of diesel going up by an additional Rs10 per litre. According to sources, the government had targeted the collection of Rs855 billion on account of PDL, but its projected collection only amounted to Rs680 billion. As a result, the government has decided to increase the rate of PDL by Rs5 per litre on diesel from March 1 and Rs5 per litre from April 1, 2023.
Currently, the government is charging a Rs50 levy per litre on petrol and High-Octane Blending Component (HOBC), while the levy on diesel is Rs40 per litre. This levy on diesel will also be raised to Rs50 per litre during the next two months, as per sources.
Diesel is widely used in the agriculture and transport sectors and has a monthly consumption of over 500,000 metric tonnes. In the 28 days of February, the consumption was estimated at 565,000 metric tonnes. The price increase, however, is most likely to affect farmers entering crop sowing season – during which ordinarily consumption increases.
While the government had also allocated an amount of Rs699 billion in the budget for subsidies in the ongoing financial year, it is now expecting that amount to go up to Rs1,177 billion. In a cabinet meeting held last week, a detailed presentation on the 9th review of the International Monetary Fund (IMF) under the Extended Fund Facility (EFF) arrangement and its fiscal implications was discussed.
The cabinet was informed that recouping the deferred June and July 2022 fuel cost adjustments (FCAs) will start from March 1, 2023, along with the implementation of a surcharge of Rs3.39/kwh (to Rs3.82/kwh). The meeting was also told that the recently announced subsidy packages on the Zero-Rated Industry and agriculture, approved by the ECC on Feb 10, 2023, will expire on March 1, 2023. All the said measures are in line with commitments made to the IMF.
The government of Pakistan had entered into a three-year EFF arrangement with the IMF, amounting to $6 billion. Pakistan has completed eight IMF reviews thus far and has cumulatively received $3.9 billion. Upon conclusion of negotiations during the lenders’ 9th review of Pakistan’s economy, the IMF agreed to revise the primary deficit target for FY23 to 0.5% of GDP. This was, however, linked with measures to generate additional revenue, necessary rationalisation in expenditure, doing away with non-targeted subsidies, as well as enhanced social sector spending, including those funds being spent on flood relief and rehabilitation.
During the discussion, it was highlighted that the lender’s initial demand was to impose additional taxes – somewhere to the tune of Rs875 billion – which after tough negotiations was revised down and mutually agreed at Rs170 billion. The IMF was also sensitized to the impact these conditions would have on the poor, after which they agreed to enhancing social spending by Rs40 billion.
While the members were concerned over the inflationary burden that the additional taxes would place on the common man, they were in consensus that the government had no choice but to return to the IMF program. Other international lenders, including friendly countries, had also linked their financing to the successful resumption of the IMF. A cabinet member underlined that, after years of mismanagement and neglect, the country’s economy was in dire need of painful policy decisions that steer it out of this crisis cycle. Other members endorsed the need for structural reforms, even at the cost of eroding political capital.
