Starting July 1, petrol and high-speed diesel (HSD) prices in Pakistan are set to rise significantly following four consecutive fortnightly reductions. Petrol is expected to increase by Rs7 per litre and HSD by Rs8 per litre, driven by escalating international market prices.
In the past fortnight, the price of petrol in the global market has surged by $4.4 per barrel, while HSD has seen an increase of $5.5 per barrel. This uptick in global prices, coupled with existing tax structures, translates to an anticipated hike of Rs7 for petrol and Rs8.5 for HSD per litre domestically.
Potential impact of Petroleum Development Levy (PDL)
The price hike could be steeper if the government raises the petroleum development levy (PDL) beyond the current Rs60 per litre. The Finance Bill 2024 has set a new PDL limit at Rs80 per litre, aiming to collect Rs1.28 trillion in the new fiscal year, compared to Rs960 billion in the outgoing year.
Finance Minister Muhammad Aurangzeb indicated on June 13 that the PDL would be incrementally increased based on market trends. This gradual adjustment aims to meet fiscal targets while managing the impact on consumers.
Recent trends and fiscal targets
From May 1, petrol and HSD prices had been on a downward trajectory due to a slump in international markets. Petrol prices dropped by about Rs35 per litre to Rs259, and HSD prices fell by Rs22 per litre to Rs268 during this period.
The government has already reached the Rs60 per litre PDL ceiling on both petrol and HSD. In the current fiscal year, the target for PDL collection was set at Rs869 billion, revised to Rs960 billion, aligning with commitments made to the International Monetary Fund (IMF). The new fiscal year’s budget aims for a more ambitious collection of Rs1.28 trillion.
Taxation and its impact on inflation
Currently, the government imposes approximately Rs77 per litre in taxes on petrol and HSD, including a Rs60 per litre PDL and about Rs17 per litre customs duty. While the general sales tax (GST) on all petroleum products remains at zero, these taxes significantly impact consumer costs.
Petroleum and electricity prices are primary inflation drivers in Pakistan. Petrol is crucial for private transport and small vehicles, affecting the middle and lower-middle classes directly. HSD, used in heavy transport and agricultural machinery, influences the prices of essential goods, including food items, contributing to overall inflation.