New government of Pakistan under immense pressure

Islamabad, Pakistan: The government of Pakistan has fallen once again without completing its tenure. The new Prime Minister of Pakistan Shehbaz Sharif is under immense pressure due to the rise of oil prices amid the Russia-Ukraine war.

If the new government maintains the freeze on petroleum prices, another circular debt crisis may erupt in the country. However, if it raises oil prices, the decision will immediately hurt the popularity of the new government, reported The Express Tribune.

At present, energy companies are facing financial constraints and are struggling to get their outstanding dues cleared. Oil and gas sectors are reeling from Rs 1.6 trillion worth of circular debt whereas the power sector has a circular debt close to Rs 2.5 trillion, said the officials.

Apart from the circular debt woes, price differential claims of billions of rupees are emerging because of the freeze on oil price revision while in the international market crude oil has risen to multi-year highs, reported The Express Tribune.

Already, the consumers in Pakistan are paying record high prices of petroleum products. Former prime minister Imran Khan announced a relief package on February 28, 2022 including a reduction of Rs 10 per litre in the consumer prices of motor spirit (petrol) and diesel and a promise to keep prices unchanged by the end of current fiscal year in June 2022.

The decision included payment of subsidy to oil marketing companies (OMCs) and refineries in the form of price differential claims.

Subsequently, allocation of Rs 20 billion and Rs 11.73 billion through a supplementary grant was approved by the Economic Coordination Committee (ECC) on March 7 and 15, 2022 for the payment of price differential claims for the period November 1 to 4, 2021 and March 1 to 31, 2022. These decisions were ratified by the federal cabinet.

As per assessment of the Oil and Gas Regulatory Authority (OGRA), the allocated amount will be sufficient to cover the price differential claims for March 19 to 31, 2022.

Later, Ogra pointed out that due to the rising oil prices in the international market, the price differential claims for the first fortnight of April 2022 was projected at Rs 26.47 billion and for the whole month they were estimated at Rs 53-55 billion, reported The Express Tribune.
International energy markets have remained volatile and motor spirit and diesel premiums remain high. As a result, the liquidity position of Oil Marketing Companies (OMCs) and refineries is under stress. Subsidised prices of petroleum products add to the stress as the full cost recovery is made only when price differential claims are processed after a lag of almost one month.

The availability of petroleum products may be impacted due to this stress. The Oil Companies Advisory Council (OCAC) has expressed concern over the situation through a letter and OGRA has also voiced similar concerns.

If the energy markets continue to behave in a similar fashion, the estimated price differential claims for the period covering April 16 to June 30, 2022 will soar to Rs 136 billion.

The demand for motor spirit and diesel stands very high, which is not only making the petroleum market vulnerable to supply disruptions and placing a heavy burden on the sector’s liquidity, but is also inflating the import bill.

OCAC, in a letter to the Petroleum Division, said that the situation remained complex and stressful with the price differential claims soaring due to the rising crude oil prices on the back of the Russia-Ukraine conflict and the strengthening US dollar.

Now, the question arises of whether the new government will be able to tackle these issues. The answer may be difficult as oil prices stay high in the global market.

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