Pakistan government cuts petrol prices, IMF-related taxes not fully reflected

The Pakistan government has decided to reduce petrol and diesel prices by 1.97 Rs per liter to partially reflect the decline in global crude oil prices seen last week. This decision has come into effect immediately, valid from the beginning of July, and covers the weekly period ending on July 10. Accordingly, the price of high-octane petrol has been reduced from 299.50 Rs to 297.53 Rs per liter as the ex-depot price for the next week, while the price of high-speed diesel (HSD) has been lowered from the current level of 311.47 Rs to 309.50 Rs. Although prices have shown a significant downward trend since the historical peak levels reached in April, the government's increase in various tax rates to avoid revenue loss has been a primary factor preventing fuel users from fully benefiting from this decline. In particular, movements in diesel prices, which are used heavily in the logistics sector, are being closely monitored by economic observers as they directly affect general inflation rates.

The current improvement in fuel prices points to a much better position compared to the record levels seen in early April. Petrol prices have recorded a cumulative decline of approximately 109 Rs per liter since the peak of 458.41 Rs in early April. Similarly, HSD diesel prices have retreated from the peak of 520.35 Rs in the same period to current levels, but are still quite high compared to the 266 Rs levels in early March. While geopolitical risks triggered by the US-Iran tension in February are cited as the main reason for these price fluctuations, tax mechanisms that prevent global market fluctuations from fully coinciding with local prices have been put in place. Market analyses reveal that the government is willing to pass on this decline in crude oil prices to the consumer but was forced to make some definite financial decisions due to budget discipline.

To close the fiscal gap and fulfill commitments under agreements with the International Monetary Fund (IMF), the economic management has moved to increase some tax items despite the price reduction. The petroleum levy on fuel products has been slightly increased, and the climate change support tax has also been raised to 5 Rs per liter as of July 1. If these tax increases had not been made, it would have been possible to make a much more serious reduction of approximately 11 Rs per liter in petrol prices and 4 Rs in diesel prices. However, IMF requirements to double the climate tax and associated revenue targets caused the government to keep the reduction limited. The total tax burden on diesel, including customs duties, has risen to approximately 101 Rs per liter, while the total tax burden on petrol has risen to approximately 95 Rs.

Behind the tax increases lie the government's commitments to international financial institutions and the need to increase budget revenues. Fiscal policies implemented under the IMF program directly affect taxation mechanisms in the energy sector, causing discounts at pump prices to remain limited no matter how large the global price drops are. In addition to the petroleum levy, customs duties and the newly introduced climate support tax constitute important revenue items entering the government's coffers. The amount of these taxes constitutes almost a third of the final price of fuel reaching the consumer, becoming the largest component of the cost. Economic commentators note that this creates a difficult balance between the goals of reducing energy costs and fighting inflation and the necessity of ensuring the budget balance.

In terms of general energy consumption and revenue generation, petrol and high-speed diesel are among the most critical revenue sources for the government. While the monthly sales volume of these two products varies between 700,000 and 800,000 tons, the monthly demand for kerosene used in kitchens remains only at the level of 10,000 tons. This large gap is the main reason why the government concentrates its taxation policies on main fuel products. While taxes on other products such as kerosene and light diesel oil are kept lower, the tax burden on main products is sought to be maximized. The new prices set for next week, despite the improvement in global market conditions, have not been able to fully offer the expected relief to citizens due to the country's financial obligations.