ISLAMABAD:
The government is planning to increase the petroleum levy to Rs85 per litre to raise an additional Rs540 billion, use dividends of the state-owned companies (SOEs) and savings from diversion of imported cargoes to settle Rs1.7 trillion worth of gas sector circular debt.
The plan, which has been discussed in depth at the level of the Minister for Finance Muhammad Aurangzeb this week, involves imposing an additional Rs5 per litre petroleum levy on petrol and high-speed diesel to raise money through 2031 to retire the debt, according to government sources.
The plan would partly transfer the cost of past wrong decisions to every household that will now be paying Rs5 extra on every litre of petrol and diesel, subject to cabinet approval.
Government sources said that the Petroleum Division has proposed settling Rs1.7 trillion worth of gas sector circular debt through a combination of using dividends of state-owned oil and gas companies, increasing petroleum levy and diverting savings from LNG cargoes.
Subject to the approval of the federal cabinet and the International Monetary Fund (IMF), the government has prepared a plan to settle the principal amount of the circular debt over a period of six years.
Unlike the power sector, the gas sector does not have guaranteed revenue streams to settle the circular debt, said Minister for Petroleum Ali Pervaiz Malik while commenting on the development. The minister said that in the absence of such revenue streams, it is being considered to use the dividends of the companies and other means to settle the Rs1.7 trillion. The government charges Rs3.23 per electricity unit to pay the interest and the principal of the power sector circular debt. The existing rates of the petroleum levy are Rs75 per litre for diesel and Rs79.62 for petrol, which will go up to Rs80 and Rs85 per litre, respectively.
The total outstanding gas sector circular debt is estimated at Rs3.3 trillion as of end June, including Rs1.5 trillion on account of late payment surcharges.
Sources said that during the meeting, the finance ministry largely supported the plan but made observations about the timeframe to settle the debt and whether the estimated Rs680 billion dividends should be given from the regular proceeds or over and above budgetary amounts.
The plan is based on the assumption that gas tariffs will remain equal to the actual cost and there would not be any further accumulation of the debt. The Petroleum Division has proposed to settle Rs680 billion by utilising the dividends of oil and gas exploration companies. The second major component will be an increase in the petroleum levy that will generate Rs540 billion from fiscal year 2027 to 2032, according to the sources.
The major dividend contribution is expected from Oil & Gas Development Company Limited, estimated at over Rs250 billion, said the sources. Pakistan Petroleum Limited is expected to give about Rs230 billion in dividends and Government Holding Private Limited nearly Rs200 billion, said the sources.
The government has proposed using Rs415 billion saving from the diversion of LNG and another Rs75 billion from recoveries. The Petroleum Division has proposed that the savings from LNG diversion should be used for retiring the debt instead of reducing the prices.
However, the gas sector debt retirement will be contingent upon the recipients’ consent to waive off the interest on late payments of their dues. A similar model had also been applied in the power sector circular debt retirement.
The major contributor to the debt is the less-than-required increase in gas prices, which is equal to a little under half or Rs1.5 trillion, according to the Petroleum Division. The impact of diverting expensive imported gas to households on the circular debt is Rs410 billion and another Rs217 billion is because the FBR has used the money to inflate its revenues. However, the sources said that the Finance Division made observations about using the refunds for the debt settlement.
When contacted, the spokesman of the finance ministry said that the gas sector circular debt management plan was part of the government’s reforms agenda. He said that various proposals were under consideration in this regard and consultations were underway between the Petroleum Division and Finance Division. The final set of proposals, agreed at the inter-ministerial level, will be submitted for approval of the cabinet, said the finance ministry spokesman. In its staff level report, the IMF has also commented on the need for reducing the gas sector circular debt through retirement of stocks and half-yearly adjustment in prices.
The IMF said that overall gas tariffs remained in line with costs, which helped reduce principal gas sector circular debt by Rs86 billion last year. But there was an increase in late payment surcharges owed to gas suppliers, which raised overall circular debt by Rs227 billion to Rs3.2 trillion by June this year.
The IMF said that Pakistan was planning to continue with timely semi-annual gas tariff adjustments in line with cost recovery to continue to stem the large gas debt stock, while maintaining tariff progressivity to protect the most vulnerable consumers.
However, it acknowledged that due to the shifting of high-paying industrial consumers to the national electricity grid, the burden of progressivity is now falling on high-end residential consumers.
The government has assured the IMF that it will notify the new gas prices by mid-February, and the price structure will be based on “preserving tariff structure progressivity, protecting vulnerable household consumers, and fully reflecting the cost of imported RLNG diverted to the domestic sector”.
