Dynamics Of Fuel Price Hike: Expect More Of Same In Next Govt Too

Dynamics Of Fuel Price Hike: Expect More Of Same In Next Govt Too
Finance Minister Ishaq Dar announced on Tuesday a significant increase of approximately Rs19 per litre in petrol and diesel prices. This decision was made in accordance with the demands of the International Monetary Fund (IMF). The revised prices have already been implemented.

The recent price hike is expected to further strain the purchasing power of the public, which is already grappling with high inflation. In July, the Consumer Price Index inflation reached 28.3%. Despite this, the minister acknowledged that the increase was inevitable due to the agreement with the IMF to raise the petroleum development levy (PDL) on fuel rates. He emphasized that had it not been for the agreement, the government would have reduced the PDL to alleviate the burden on the public.

READ MORE: Massive Rise: POL Prices Up By Rs19

The Latest Hike

A major role in the latest fuel price hikes was played by the global surge in prices. The International Energy Agency has projected a significant increase in global oil demand, estimating a rise of 2.2 million barrels per day, resulting in a record 102 million barrels per day this year. However, global oil production is expected to only increase by 1.5 million barrels per day, reaching 101.5 million barrels per day, according to a report released by the agency. This supply gap has been further intensified by production cuts implemented by OPEC+, which consists of major oil-producing nations.

Source: JS Research

Furthermore, the government, which initially insisted on maintaining the PDL at PRs45 per litre, was compelled to revise it upwards as part of the revenue generation measures outlined in the Standby Agreement with the IMF. The agreement stated, "The maximum petroleum development levy (PDL) will be increased to PRs60 per litre, with a planned progression of increases to eventually reach an average rate of PRs55 per litre by FY24. This adjustment is estimated to generate an additional Rs79 billion."

High Speed Diesel Prices August 1
Source: OGRA, JS Research

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Grappling with Inflation

In July 2023, as per a report by KTrade. Pakistan's CPI inflation exceeded expectations, reaching 28.3%. This inflation figure took into account the recent hike in power tariffs, which was implemented in accordance with the government's agreement with the IMF. As a result, electricity prices witnessed a significant 40% month-on-month increase. Furthermore, food inflation rose by 4% month-on-month due to higher prices of perishable food items.

Interest Rates August 1

Source: KTrade

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Moving forward, analysts anticipate that the depreciation of the currency and the rise in petroleum prices may impede the downward trend of inflation. However, considering the high base effect, our average forecast for CPI in FY24 stands at 22%.