Chairperson Oil and Gas Regulatory Authority (Ogra) Uzma Adil while speaking at a public hearing stated that gas prices would have to be 'inevitably' raised by between 75 to 80 percent from next fiscal year commencing 1 July 2019 adding that gas prices had not been raised during the past two years. The latter claim is inaccurate; while the previous PML-N administration resisted attempts to raise gas prices thereby extending subsidies and allowing a rise in the circular debt of the gas sector yet during the Pakistan Tehreek-e-Insaaf (PTI) administration gas prices have been raised twice though not by enough to meet the final revenue requirements (FRR) as calculated by Ogra.
In October 2018, the PTI government approved recovery of 95 billion rupees from consumers that raised domestic consumer prices by up to 143 percent with the government maintaining that the bulk of the raise was limited to the rich. The three slabs consisting of lower to middle income earners were to bear a relatively small raise: (i) those consuming up to 50 cubic meters per month (estimated at around 38 percent of all consumers) would witness a 10 percent increase; (ii) those consuming from 50 to 100 cubic meters would bear a 15 percent increase; and (iii) those consuming between 100 and 200 cubic meters would experience a 19 percent increase.
During the last days of February 2019, the government notified a seven percent increase in LPG price and a 22 percent increase in gas price to meet unmet revenue requirements estimated at 75 billion rupees for the current year. This implied a 111 rupee per unit increase was necessitated in March as per Ogra, however, the government opted not to raise gas price for nine months and concentrated the entire raise in the winter months when demand is high in upcountry areas which created a public furore. Additionally, the government reduced tariff for zero-rated industries while keeping the rate for tandoors constant accounting for FRR falling further short of targets - decisions, it was maintained by Ogra in March this year, that would necessitate an increase in tariffs by about 120 rupees per MMBTU. This observation made last month no doubt explains Adil's statement that tariffs would have to be raised by 75 to 80 percent by 1 July 2019.
In March this year, Ogra also revealed that approximately 2 billion dollar worth of gas was stolen every year across the country - a factor responsible for the bulk of the more than 11 percent unaccounted for gas (UFG) losses. And further contended that a massive revenue shortfall, of about 164 billion rupees, would be evident by 30 June 2019 until and unless the government opted to raise gas rates during the current fiscal year, which explains Adil's contention that a raise is inevitable.
While the raise in gas tariffs has not kept pace with the raise in its purchase price, leading to the persistent failure as well as rising shortfall in meeting the FRR of the two gas companies yet given that the tariffs are set in dollars the steady rupee depreciation has also contributed to the need to raise rates. At present, the government levies excise duty as well as 17 percent general sales tax on gas as well as levies a gas infrastructure development cess (not realized revenue due to court cases) though the government is currently negotiating with those collecting GIDC but not crediting it to the treasury to pass on a certain percentage of collections. And natural gas development surcharge budgeted to generate 16 billion rupees in the current year (with 23 billion rupees collected last year under this head). Thus by manipulating taxes, the government can absorb not passing on the rate rise to consumers though its own finances would suffer significantly as a consequence.
There is little doubt that in the event the government goes on an IMF bailout package, the pressure to raise rates would be significant for the short-term; and in the medium-term the Fund would urge a resolution of the GIDC-related court case as well as to improve the performance of the sector that is increasingly suffering from the same malaise as the electricity sector: rising circular debt that is creating severe liquidity problems requiring periodic government releases.