March 23, 2023
Economy Pakistan

Pakistan Raises Fuel Levy to Meet Revenue Shortfall, Farmers Brace for Impact

The government has announced that it will increase the petroleum development levy (PDL) on diesel by Rs5 per litre from March 1 and by an additional Rs5 per litre from April 1, 2023, in order to cover a shortfall in revenue. The target collection for PDL was Rs855 billion, but it has only collected Rs680 billion so far. In addition to the increase in the PDL on diesel, the government will also raise the levy on petrol and High-Octane Blending Component (HOBC) from Rs50 to Rs55 per litre for the next two months.

The increase in diesel prices is likely to affect the agriculture and transport sectors, which are the primary users of diesel. The consumption of diesel is over 500,000 metric tonnes per month, with an estimated consumption of 565,000 metric tonnes in February. This price increase is expected to affect farmers during the crop sowing season, which typically sees an increase in diesel consumption.

The government had allocated Rs699 billion for subsidies in the current fiscal year, but it is now expecting that amount to rise to Rs1,177 billion. This increase in subsidies is due to the need to recoup deferred fuel cost adjustments and implement a surcharge of Rs3.39/kwh from March 1, 2023, along with the expiration of recently announced subsidy packages on Zero-Rated Industry and agriculture. All of these measures are in line with commitments made to the International Monetary Fund (IMF).

Pakistan had entered into a three-year Extended Fund Facility (EFF) arrangement with the IMF for $6 billion, and it has completed eight reviews so far, receiving $3.9 billion. The IMF revised the primary deficit target for FY23 to 0.5% of GDP, but this was linked with measures to generate additional revenue, rationalize expenditure, and enhance social sector spending. Initially, the IMF demanded additional taxes of Rs875 billion, but it was eventually agreed upon at Rs170 billion. The IMF also agreed to enhance social spending by Rs40 billion after being sensitized to the impact these conditions would have on the poor.

While some members of the cabinet expressed concern over the inflationary impact of the additional taxes on the common man, they agreed that the government had no choice but to return to the IMF program. Other international lenders had also linked their financing to the successful resumption of the IMF. The cabinet recognized the need for painful policy decisions and structural reforms to steer the country’s economy out of the crisis cycle.

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