Petroleum levy in Pakistan set to rise to Rs80 per liter to reduce circular debt

The Pakistani government is exploring various measures to tackle the mounting circular debt, including a potential increase in the petroleum levy on all petroleum oil lubricants (POLs) from the current Rs60 to Rs80 per litre.

In anticipation of the upcoming budget, authorities are contemplating imposing an additional levy on petroleum products and raising gas tariffs beyond the revenue requirements of gas companies. To address the circular debt in the gas sector, which has reached Rs2.9 trillion, the government plans to utilize the Gas Infrastructure Development Cess (GIDC) funds currently held by the Finance Division.

Officials are also considering strategies to reduce inter-corporate debt, potentially through a combination of cash payments and book entries, similar to methods used in 2013 to clear circular debt in the power sector under former finance minister Ishaq Dar.

Read More: Government Reverse Petrol Price Decision, Rs. 15 Cut Announcement False

In line with directives from the International Monetary Fund (IMF), the finance ministry has opted not to allocate budgetary subsidies in the upcoming fiscal year to offset the Rs260 billion loss from the non-recovery of Re-gasified Liquefied Natural Gas (RLNG) diversions to domestic consumers. The Petroleum Division has been tasked with proposing practical solutions to address the circular debt issue, including the potential increase in the petroleum levy by Rs20 per litre to fund debt repayment in the gas sector.

To utilize the GIDC funds, currently at Rs350 billion, collected from various companies, the government would need to amend the GIDC Act. An additional Rs400 billion in GIDC payments are yet to be recovered from the fertiliser and compressed natural gas (CNG) sectors.

Experts suggest that increasing gas tariffs beyond the revenue requirements of gas companies could generate surpluses to gradually reduce the circular debt, although this would require strong political will from the government. Additionally, the government is considering maintaining natural gas prices from July 2024, instead of implementing the recommended 10% reduction, to help offset the Rs1.5 trillion shortfall.