Pakistan: Shehbaz Sharif’s government haunted by the circular debt crisis

Pakistan’s new prime minister is under enormous pressure due to soaring oil prices caused by the Russian-Ukrainian conflict and is haunted by the circular debt crisis. If the new government maintains the oil price freeze, another circular debt crisis could erupt in the country. However, if he raises oil prices, the move will immediately hurt the popularity of the new government, The Express Tribune reported.

Currently, energy companies face financial constraints and struggle to get their arrears cleared. The oil and gas sectors are reeling from a circular debt of 1.6 trillion rupees, while the power sector has a circular debt close to 2.5 trillion rupees, officials said. Apart from circular debt issues, differential price claims of billions of rupees are emerging due to oil price review freeze as crude oil hit multi-year highs in the international market, The Express Tribune reported. .

Already, Pakistani consumers are paying record prices for petroleum products. Former Prime Minister Imran Khan announced a relief package on February 28, 2022 including a reduction of Rs 10 per liter in the consumer prices of motor petrol (petrol) and diesel and a promise to keep prices unchanged by the end of the current fiscal year in June. 2022. The decision provided for the payment of a subsidy to Petroleum Marketing Companies (OMCs) and refineries in the form of price differential claims.

Subsequently, the allocation of Rs 20 billion and Rs 11.73 billion through an additional grant was approved by the Economic Coordination Committee (ECC) on 7 and 15 March 2022 for the payment of differential claims of prices for the period from November 1 to 4, 2021 and March 1 to 31, 2022. These decisions have been ratified by the federal cabinet. According to the assessment of the Oil and Gas Regulatory Authority (OGRA), the allocated amount will be sufficient to cover the price differential requests from 19 to 31 March 2022.

Later, Ogra pointed out that due to rising oil prices in the international market, price differential claims for the first half of April 2022 were projected at 26.47 billion rupees and for the whole month, they were estimated at 53-55 billion rupees, reported La Tribune Express. International energy markets have remained volatile and gasoline and diesel premiums remain high. As a result, the liquidity position of Petroleum Marketing Companies (OMCs) and refineries is under stress. Subsidized prices for petroleum products add to the tension, as full cost recovery is only made when requests for price difference are processed after a delay of almost a month.

The availability of petroleum products could be impacted due to this stress. The Petroleum Companies Advisory Council (OCAC) expressed concern over the situation in a letter and OGRA also expressed similar concerns. If the energy markets continue to behave similarly, the estimated price differential for the period April 16 to June 30, 2022 will climb to Rs 136 billion.

The demand for motor gasoline and diesel is very high, which not only makes the oil market vulnerable to supply disruptions and weighs heavily on the sector’s liquidity, but also inflates the import bill. OCAC, in a letter to the Petroleum Division, said the situation remained complex and stressful with price differential claims skyrocketing due to rising crude oil prices following the Russian-Russian conflict. Ukraine and the strengthening of the US dollar.

Now the question arises whether the new government will be able to tackle these problems. The answer may be difficult as oil prices remain high in the global market. (ANI)

(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)

Robert P. Matthews