Petroleum product prices are at their highest ever level in Pakistan creating concerns amongst common folk and businesses alike. Pretty soon the prices of food and just about everything else will also be rising at a higher pace given the jumps in rates of petroleum and high speed diesel HSD.
While rising petrol rates get all the media attention, being dubbed "petrol bomb"; it is actually the increase in the price of HSD that has the larger compounding effect on inflation.
Diesel constitutes one-third of the petroleum product consumption and two-third of the fuel consumption in the transport sector. No marks for guessing then that any increase in diesel prices has a far more significant impact on inflation than that in gasoline or kerosene prices.
There was a time, not so long ago that the government used to subsidise HSD significantly, to the tune of Rs37 per litre. These subsidies were doled out as recently as late 2008. Since that time, the sector has gradually moved towards price deregulation for all the right reasons as subsiding imported fuel made little sense.
Pakistans weak fiscal condition offers little to no room for any more subsides. Drawing comparisons with Indian practice would not help as India offers $25 billion as subsidy on petroleum products every year-a number that is nearly equal to Pakistans annual exports.
While subsidising HSD is no more an option-some circles still believe that Pakistan could still afford to lower HSD prices without impacting the net revenue position. The idea is to abolish the Petroleum Levy on HSD and compensate it with a proportionate increase in other product prices such as motor gasoline.
The argument goes that lowering HSD rates would have a more far-reaching impact on controlling inflation, even if that comes at the cost of a substantial rise in gasoline prices. There is no denying that the trickle down impact of HSD price hike is significant as it accounts for the lions share in transport fuel.
That said there is little evidence suggesting that lowering HSD rates will actually result in lower inflation. Unfortunately, it is not a common practice in Pakistan to pass on the impact of a price revision on the lower side. On the other hand, the resultant increase in petrol rates could trigger a new round of inflation, with or without any macroeconomic justifications-as the political pressure and media hype is enough to create such an environment.
Transport fuel weighted at three percent in the Consumer Price Index calculation, of which HSD should make nearly two-thirds. Whether or not a reduction in HSD is worth the pain at the cost of escalating petrol prices is a debate that is open for the forum.
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