Karachi, October 05, 2021 (PPI-OT): Petroleum Levy collection seems like a tall order

The budgeted 35% growth in Petroleum Development Levy collection to Rs610bn (c.1.3% of GDP) for FY22 seems far-fetched at this point since only 3% of the measure has been achieved in 1QFY22 and stubbornly high inflationary pressures from stellar oil prices continue to consume a massive portion of hike in retail fuel prices.

The colossal target of Rs610bn worth of Petroleum Levy was set at the onset of FY22. This was right after the government surpassed the seemingly impossible target of Rs450bn set for FY21. However, it appears now that this may have been a ‘heat-of-the-moment’ decision as analysis of the PDL collection so far does not draw a promising conclusion.

In a perfect world, the federal books would, by the end of the first quarter, reflect PDL collection of Rs152.5bn i.e. 25% of the target. Sadly, the government actually stands with less than Rs18bn in PDL collection. There is no easy way to say that less than 3% of the target so far.

Government had to give an arm and a leg to shelter the masses from the impact of higher crude prices; PDL that averaged over Rs20/Litre in FY21 has remained below Rs4/Litre in the outgoing quarter. With international oil prices not likely to go South in the near term, it seems that some difficult economic decisions are in order. However, pushing up prices of retail fuels far into unchartered territory would have detrimental impacts on economically sensitive and worrying matter of inflation. We estimate that for every Rs 10/Litre rise in fuel rates, ceteris paribus, the headline inflation jumps by 0.23- 0.25ppts. Considering the need for petroleum levy collection from this point onwards, the impact of additional levy translates into 0.7ppts; which can be exacerbated by transmission of rising oil prices and Rs depreciation.

Assuming volumetric sales grow by 10% YoY in FY22, we estimate that the government will have to charge an average of over Rs34/Litre for the remaining calendar. In fact, to achieve the set target while keeping the levy within the legal cap of Rs30/Litre, we estimate that volumetric sales will have to go up by a massive 24% YoY in FY22 (see chart for scenario analysis).

Coincidently, this is exactly the growth seen during 1QFY22 where volumetric sales swelled to 5.86mn tons from 4.74mn tons during the same quarter last year. This growth was led predominantly by High Speed Diesel (HSD) which saw a 27% rise in sales while demand for Motor Spirit (MS) grew by 14%. The highlight of the quarter however was Furnace Oil where we see sales going up by as much as 38% over the same period last year taking the share of black oil to an impressive 22% of the overall sales mix.