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Impacts of Cut in Petroleum Prices on the Economy

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By Khurram Schehzad

Government has passed on petroleum product prices today by an average 26%, or PKR 22/ltr on average, from last levels, which is 70% of what has OGRA suggested . CNG prices are also down by ~15%.

With this, impact on Inflation, Revenues and Relief efforts is expected/estimated to be as follows:

1)- Inflation

This 26% decline on average in petroleum products would have an estimated direct impact of 2.6% in the form of decline in CPI inflation in the coming months.  CPI currently standing at over 10%, should go down to around 7.5% in the coming months. Good for the masses and the economy at large.

Though a support to traditional rate cut thesis, but the Policy Interest Rate should be cut irrespective!

2)- Taxes

As per sensitivity at last petroleum prices, every PKR 10/ltr leads to revenue impact of about PKR 15bn/month for the GoP. So, passing on PKR 22/ltr on average, there should be an estimated PKR 34bn/month impact on taxes, while remaining should still be saved for relief efforts.

3)- Relief to ‘All’

After this balancing act by the GoP, the leftover tax benefit can be best put to use by providing relief to both, common man as well as industries and businesses; Common man thru social safety nets/programs, while some reduction in taxes (Indirect/Direct both) should lead to support to employment and overall economic activity.

Hope, together we are able to fight these challenging times well. InshaALLAH.

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