From handing out up to 14 rupees/litre as a gasoline subsidy to a petroleum tax (PL) of 50 rupees/litre – all in less than six months, was quite a turnaround. The government has now exhausted the upper limit of the PL. The base price of petrol at 164.47 rupees per unit for the first half of November is the lowest since May 2022 – almost when the Shahbaz-led administration took office.

The benchmark light Arabian crude price and the rupee-dollar parity remained virtually unchanged over the previous fortnight, leaving the light Arabian PKR price untouched. The difference came from the Inland Equalization Freight Margin (IFEM) which came down to minus 35 paisa, allowing the government to reach the maximum limit of PL without having to change the retail price, well before the deadline agreed with the IMF.

The FY23 target for average PL on petrol at Rs40/litre looks well on track – and early achievement of the target could even push the average up. This allows the government to tinker with the PL at the lower end if necessary. The real deal is the challenge on the HSD front. The average PL on HSD for FY23 has been agreed at Rs32/ltr. The current PL on HSD is a little higher than Rs12/unit. There is still time to reach the maximum limit of Rs50/litre, but it could well run out quickly, as the government plays the balance between HSD and petrol.

Notice that the diesel spread is currently the highest since at least 2005. It will never be easy to increase the PL on HSD without having to increase the retail price. Unless, of course, international oil prices fall significantly, the signs of which seem slim in the short term. One option for the government to continue to manage the HSD retail price is to increase the maximum PL limit on gasoline.

In other news, the ECC has also approved increased margins for oil marketing companies, which are now set to increase by 63% – from Rs 3.68/litre to Rs 6/litre. The IMF wouldn’t be too thrilled with the state of tax affairs – and could possibly ask for the collection of the GST. The government has so far been quite open to higher petrol taxes, but is reluctant to treat HSD in the same way.

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