PDL collection target at risk

LAHORE: Amid pressure from the International Monetary Fund (IMF) to increase revenue generation, the collection of the Petroleum Development Levy (PDL) appears jeopardized as fossil fuel sales plummet to one of their lowest levels.

Dull sales during the first quarter of the financial year 2024-25 have placed significant pressure on the PDL target. The target remains challenging mainly due to depressed volumes in Q1 FY25. It is estimated that PDL collection for September 2024 stands at Rs87 billion, 23 per cent lower than the monthly target needed to meet the FY25 PDL goal of Rs1.28 trillion, according to JS Research.

To achieve the annual PDL target, a monthly growth of 19 per cent year-over-year (YoY) would be required, assuming the PDL charge is increased by Rs10 per litre from next month to Rs70 per litre. Given the lower likelihood of reaching this target due to multiple factors, a shortfall in PDL collection -- which accounts for 7.0 per cent of the total revenue target for FY25 -- cannot be ruled out, marking a key risk to fiscal and primary balance targets.

Considering the potential shortfall in meeting the PDL target, it is estimated that the PDL collection for Q1 FY25 may reach Rs252 billion, an 11 per cent increase YoY due to the gradual rise in the PDL charge. For context, the FY25 PDL target of Rs1.28 trillion is 26 per cent higher than the collection in FY24.

Our estimates suggest that to meet the collection target set in the FY25 budget, Motor Spirit (MS) and High-Speed Diesel (HSD) volumes would need to post a growth of 19 per cent YoY in the remaining months of FY25, factoring in the Rs10 per litre PDL charge starting November 1, 2024, said Muhammad Waqas Ghani of JS Research.Assuming no increase in the PDL charge for the year, the volume growth requirement would soar to 36 per cent YoY in the remaining months. Given the lower probability of achieving these growth levels in oil marketing company (OMC) volumes, a shortfall in PDL collection seems likely this year. The ongoing trend of flat OMC sales could lead to a Rs160 billion shortfall from the FY25 target, amounting to 13 basis points (bps) of GDP.

The federal government has set an ambitious target to collect Rs1.28 trillion through the petroleum levy in the fiscal year 2024-25, reflecting a 47.4 per cent increase over the previous year’s goal.

It is noteworthy that the federal government achieved the PDL collection target last fiscal year, despite petroleum product demand hitting an 18-year low in FY 2023-24. The strategy of imposing a PDL of Rs60 per litre on the sale of petrol and diesel, along with the full pass-through of increased global energy prices to local consumers, proved beneficial in this regard. Consequently, the acceleration in revenue growth was partly driven by non-tax revenue due to higher PDL collection despite declining petroleum sales.

A recent report indicates that the overall economic slowdown, sluggish industrial output, high inflation, and elevated interest rates have discouraged industrial and commercial consumers, while households have reduced their commuting demands.

Interestingly, demand for petroleum products revived in the last month of FY24, reaching a 19-month high. This surge was attributed to a notable reduction in energy prices and the increased use of expensive furnace oil-run power plants to meet the heightened electricity demand during the scorching summer season.