Image: PSO

The government of Pakistan has decided to increase the petroleum development levy (PDL) in order to address a shortfall in revenue. The PDL for diesel will be raised by Rs5 per litre on March 1 and an additional Rs5 per litre on April 1, 2023, resulting in a total increase of Rs10 per litre. The government had aimed to collect Rs855 billion from the PDL but only managed to secure Rs680 billion, leading to a shortfall of Rs175 billion.

In addition to the PDL increase, the government will also raise the levy on diesel and High-Octane Blending Component (HOBC) from Rs40 per litre to Rs50 per litre during the next two months. This is expected to impact farmers entering crop sowing season, as diesel is widely used in the agriculture and transport sectors.

The government had allocated Rs699 billion in the budget for subsidies for the ongoing financial year, but now expects that amount to rise to Rs1,177 billion. The increase in PDL is in line with commitments made to the International Monetary Fund (IMF), as Pakistan had entered into a three-year Extended Fund Facility (EFF) arrangement with the IMF for $6 billion. Pakistan has completed eight IMF reviews and has received $3.9 billion cumulatively.

The IMF agreed to revise the primary deficit target for FY23 to 0.5% of GDP, but this was contingent on measures to generate additional revenue, rationalise expenditure, and do away with non-targeted subsidies. The IMF had initially demanded additional taxes of around Rs875 billion, but this was revised down to Rs170 billion after negotiations. The government highlighted the impact these conditions would have on the poor, and the IMF agreed to enhance social spending by Rs40 billion.

Members of the cabinet were concerned about the inflationary burden that the additional taxes would place on the common man, but agreed that the government had no choice but to return to the IMF program. The members recognised the need for structural reforms, even at the cost of eroding political capital, to steer the country out of its economic crisis cycle.

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