Islamabad, Pakistani authorities have announced a significant increase in gas tariffs effective from March 1, targeting primarily the domestic consumers and the fertilizer sector. This adjustment marks the second increase within four months and the third since January 2023. The move is part of efforts to tackle the growing circular debt within the gas sector, with an expected weighted average tariff increase of approximately 40% from the last revision in November 2023.
According to AKD Securities Limited, News Reports, and AKD Research, the tariff hike aims to align the weighted average gas prices with the Sui Northern Gas Pipelines Limited's (SNGPL) revenue requirement for FY24E. The proposed adjustments are estimated to significantly curb the natural escalation of gas sector circular debt moving forward. The tariff hikes are primarily focused on domestic consumers, with increases ranging from 31% to 107% for both protected and non-protected categories, which represent over 60% of total gas demand as per SNGPL data.
The revision in gas prices is considered essential for aligning sale prices with cost recovery levels, a move also insisted upon by the International Monetary Fund (IMF) as a structural benchmark. With the implementation of these hikes, inflation projections have been adjusted upwards, leading to revised National Consumer Price Index (NCPI) estimates of 22.6% for March 2024 and 25.8% for FY24E, respectively.
For the fertilizer sector, gas prices on the Sui network are expected to increase significantly for both feed and fuel, impacting the production costs for companies like EFERT and FFBL. Despite EFERT having a stay order for concessionary gas rates, the price hike will likely result in a substantial increase in urea and DAP costs, albeit with the ability for companies to pass on these costs to consumers due to domestic prices maintaining a discount compared to imported alternatives.
The adjustment in gas tariffs is seen as a critical step towards financial sustainability within Pakistan's gas sector, addressing the long-standing issue of circular debt through increased revenue from higher tariffs. However, the impact on inflation and the broader economy will require careful monitoring as these changes take effect.