Oil price decline

Dr Hafiz Pasha, former federal finance minister, in an exclusive chat with Business Recorder maintained that only 75 percent of the international price decline has so far been passed on to domestic consumers and added that the remaining 25 percent would be passed on by 1st January 2015 citing a time lag between opening of letters of credit based on the need for stock replenishment. This view was challenged by Dr Ashfaque Hassan Khan who told Business Recorder that in order to avoid too much revenue loss, given that it relies heavily on sales tax on petroleum products, the government has not passed on the reduction in the international oil price in its entirety. The truth, no doubt, lies somewhere in between - or in other words one would have to wait till 1st January to be able to assess whether the pass through of any change in the international oil price, as per Pakistan's decades long oil pricing policy, has been actually implemented or not.
Be that as it may, it is relevant to note that Dr Ashfaque Hassan Khan was correct when he pointed out that sales tax collected on petroleum products is a major component of total sales tax collected in any given year. A Business Recorder exclusive reveals that sales tax is concentrated in a few commodities and that petroleum products and natural gas alone contribute around 44 percent to total sales tax collected in 2013-14. During last fiscal year, total sales tax collected from petroleum products was 231 billion rupees while it generated 180.6 billion rupees during the last year of the PPP-led government's tenure. The higher collection last year relative to 2012-13 is attributable to a higher international price of oil that was passed on to the consumers. Thus any reduction in the price of petroleum products would reduce the sales tax collected. At a per litre price of 94.19 rupees sales tax is 13.69 rupees while at the recently-reduced rate of 84.53 rupees per litre, sales tax is calculated at 12.28 rupees per litre.
Revenue under the petroleum levy budgeted at 123 billion rupees for the current year is not likely to be affected with a price decline of oil products in the international market as it is a flat rate and therefore not dependent on the changing price of petroleum products.
Given the heavy reliance on sales tax on petroleum products, there is a concern that while lower oil price in the domestic market would reduce the rate of inflation on the one hand through a reduction in fares and farm to market costs of perishables, yet it would fuel inflation on the other hand by raising the budget deficit - an inflationary policy. Unfortunately our recent history shows that in spite of directives by the prime minister to chief ministers to ensure that local transport fares are reduced in a manner commensurate with the oil price reduction this has not been achieved. The same is not true if the price of oil is raised. In other words, in Pakistan a reduction in the price of petrol would only impact positively on those who own their own transport and the poor and the vulnerable who are forced to take public transport do not benefit from reduced oil prices. Metrobus service, much vilified as an inefficient use of scarce resources given the appalling state of our social sector indicators, does envisage giving the public an alternate source of transport from what is currently provided by private sector transporters.
The question is, what is the solution? Should the government proceed to pass on the oil price decline in its entirety knowing that it does not have the capacity to ensure pass on to the end consumers? Or should it retain some of the price decline with the objective of ensuring that its sales tax collections are not jeopardised and the budget deficit contained whose impact on the rate of inflation would be significant? It is a tough call, however, the government would be well advised to pass on the reduction in oil price entirely onto the electricity consumers as the price of generation declines due to a decline in international price - this decision would impact positively on the rate of inflation, promote productivity and fuel employment opportunities. This decision can, of course, only be possible if governance is significantly improved in our power sector.