The IMF Article IV Report detailing the contours of Pakistan’s latest Extended Financing Facility (EFF) is finally out, answering many a question. The fiscal equation agreed upon is significantly altered from what was presented in the federal budget in June 2024. The largest blow is expected delivered to the Public Sector Development Program (PSDP), which has been slashed from a budgeted Rs1.4 trillion to a more modest Rs983 billion. The 30 percent cut in PSDP was largely expected, as the budgeted PSDP was believed to be built on unrealistic grounds, and the electricity subsidies in 1QFY25 must have further resulted in the revised number.
Those keeping track also had their sights on the treatment of Petroleum Levy (PL), as the authorities started way off track, in relation to the lofty annual collection target. To recall, the government had set the FY25 PL collection target at Rs1.28 trillion – up 26 percent year-on-year.
At well under a dollar per liter, Pakistan’s retail gasoline price is now among the lowest in the region, for major oil-importing countries. It is critical because Pakistan has set a rather ambitious revenue target from petroleum consumption for FY25 – at a hefty Rs1.29 trillion. This is up 47 percent from last year’s collection of Rs869 billion.
With one-quarter of FY25 gone, the projected opportunity loss of revenue stands close to Rs40 billion, as estimated PL collection on gasoline and HSD stands at Rs236 billion based on sales of 3.9 billion liters. Petroleum sales have not rebounded from last year, and the government’s reluctance to increase PL on petroleum products to the now maximum allowable ceiling of Rs70/ltr - has contributed to the PL collection staying well below the budgeted target.
It was widely anticipated that the IMF would come hard on the government’s inability to maximize revenues on petroleum sales, as has been the case in the past. Turns out it is not the case anymore, as the IMF Report now states the PL annual collection target at a significantly reduced Rs1.06 trillion – down Rs215 billion or 17 percent from budgeted and only 5 percent higher than the revised FY24 collection of Rs1.01 trillion.
This is where the insistence on not raising the PL early in the fiscal year is now making sense. With the revised target in place, even if the consumption stays the same as last year, an average of Rs65/ltr for the year would yield the target. In the case of PL staying Rs60/ltr throughout the year, a 10 percent increase in consumption over the last year will be enough to meet the target. Price setting is tricky business, and the government may well have missed the opportunity to increase the PL earlier in the piece when oil prices were down. That said, there is no real pressure from the IMF to deal with petroleum prices in a more stringent manner – which is a departure from the Fund’s rather strict stance in many previous programs.
The Article IV Report does not even mention any timelines as regards maximizing the PL – unlike previous occasions, where phased PL increase on gasoline and HSD was part of performance criteria and structural benchmarks. There is not a mention of levying GST on petroleum either, clearly indicating the IMF is fine with Pakistan running one of the lowest pump prices in the region and among the IMF’s current leading borrowers. The overall approach is in stark contrast to the IMF’s oft-stated stance on taxation on petroleum products – which in Pakistan’s case calls for no less than 45 cents/litre. Currently, it stands at no more than 23 cents per litre. Clearly, the IMF seems to have given up on the idea of forcing partner countries to price petroleum products based on the cost of externalities. The idea, it seems, is to ensure the bottom line is met – by whatever means.
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