What Pakistan needs to do to meet its petroleum levy collection target

The Pakistan government is likely to be unable to meet its Petroleum Development Levy (PDL) collection target for fiscal year 2024-25 — one of its major sources of revenue — due to a decrease in petrol and diesel sales, driven by increased smuggling from Iran.

The government aims to collect PKR 1,281 billion in revenue from the PDL — a non-tax revenue stream that is not shared with the provinces under the divisible pool.

However, in the first two months of FY25, petrol sales have dropped by 8% year-on-year (YoY), while diesel sales have declined by 12% YoY. If this trend continues, the revenue shortfall is projected to reach PKR 158 billion by end-FY25, assuming a PDL rate of PKR 60 per liter.

In its latest fortnightly fuel prices notification issued on September 15, the government decided to slash petrol and diesel rates by PKR 10 and PKR 13 per liter, respectively. Over the last four price adjustments, petrol prices have fallen by PKR 26.5 per liter, while diesel prices have dropped by PKR 33.9 per liter due to a decline in global oil rates.

Despite room created by lower international prices to increase the PDL, the government has maintained it at PKR 60 per liter.

Projected sales for FY25's first quarter

In the first two months of FY25, petrol sales totaled 1,652 million liters while diesel sales reached 1,083 million liters. Assuming sales in September match those of August, total petrol and diesel sales in FY25's first quarter are projected to be 2,502 million liters and 1,619 million liters, respectively.

Based on these sales volumes, PDL collection for the quarter is expected to reach PKR 247 billion, averaging PKR 82 billion per month. However, this is short of the required monthly average of PKR 107 billion, resulting in a potential shortfall of PKR 73 billion by the quarter's end.

What Pakistan needs to do

To meet the annual collection target, the PDL could be evenly split between petrol and diesel, requiring PKR 640.5 billion from each. Achieving this would necessitate annual sales of 10.7 billion liters of petrol and 10.7 billion liters of diesel.

And for this to happen, sales would need to grow by 14% YoY for petrol and 60% YoY for diesel from October 2024 to June 2025, assuming the PDL rate stays at PKR 60 per liter.

Alternatively, the government could raise the PDL from PKR 60 to PKR 70 per liter starting in October. In this case, to meet the revenue target, petrol sales would need to reach 7.0 billion liters and diesel sales 7.8 billion liters from October 2024 to June 2025. This would result in total annual petrol sales decreasing by 2% YoY and diesel sales increasing by 27% YoY.