Petroleum pricing: Only hard choices remain

The situation surrounding Pakistan's petroleum pricing is becoming increasingly tense, with crude prices nearing the USD100 per barrel mark and end-product prices experiencing significant double-digit increases. The government's attempt to ease the impact of price volatility through a daily pricing system has proven insufficient, as the underlying market fluctuations continue to cause sharp movements.

Rumors suggest a proposal to lower the HSD pricing benchmark back to USD30 per barrel to mitigate the domestic price impact, but this idea has been met with resistance from refineries. Islamabad appears to be keeping a tight lid on the matter. At the heart of the issue lies the combined petroleum levy and Climate Support Levy, which currently stand at Rs85 per litre for both petrol and HSD.

While reducing these levies may seem like a logical solution, it poses significant fiscal and climate commitments challenges, especially in the face of IMF representatives currently in Islamabad. Islamabad cannot simultaneously increase fossil-fuel taxation under the Resilience and Sustainability Facility and simultaneously cut taxes during international price hikes.

Instead, the government could keep the levies intact and introduce a petroleum differential claim to maintain subsidies, but this approach is not without its drawbacks. It is a costly and poorly targeted measure that benefits all consumers equally, regardless of their ability to pay. The most immediate solution may involve letting the full international price shock pass through to consumers, but this option is not without its drawbacks either.

Cutting petroleum taxes outright would undermine Pakistan's fiscal and climate commitments, while keeping the taxes and relying on subsidies is a fiscally expensive and inequitable solution. Ultimately, the government is left with three imperfect options, each with its own set of challenges. The current situation highlights the complex trade-offs involved in fiscal consolidation and the long-term consequences of making petroleum taxation a crucial pillar of Pakistan's fiscal architecture.