Nov 24 - 30, 2008

Despite accumulated taxes on diesel and gasoline estimated at 35 percent and 57 percent excluding the sales tax, a 20 percent cut in oil prices is quite possible in the backdrop of the sharp decline in oil prices internationally.

The higher incidence of levies coupled with drastic cut in international oil prices have provided enough cushion to the government to comfortably eliminate the oil subsidy estimated at Rs140 billion incurred during first quarter of the current financial year.

Currently, government taxes make up 35% and 57% of diesel and gasoline retail prices while the government paid an estimated subsidy of Rs57billion in the first quarter of fiscal 2008-09. It is learnt that monthly tax collection, excluding GST of Rs9billion, could increase to Rs15-18billion if it does not reduce retail prices. Since Sep 08, it has reduced diesel and gasoline prices by 13% and 22%, respectively.

In fact, the weakening oil prices is a relief by default to Pakistan's macro fundamentals yet the downstream oil sector including Oil Marketing Companies (OMCs) might be facing a tougher environment in the days to come.

According to oil experts, possibility of earnings downside risk likely to strike to the profit earnings of the oil marketing companies providing them a strong case for advocating an upgrade of regulated margins to 4-4.5% from 3.5% the oil marketing companies are getting at present.

The declining oil price would also help containing the fiscal deficit at a desirable limit of 5% and mitigate the impact of higher debt servicing on foreign debt (due to 30% rupee devaluation) and on domestic debt due to hike in discount rate of the commercial banks by 5.0%.

According to industry analysts, a 10% decline in domestic oil prices to have a direct impact of 150bp on inflation with a time lag. Since the government has shown a slow posture in passing on the differential of declining oil prices to end consumer, the tax component build on retail prices has accumulated sharply.