PKR 76 billion for gas sector subsidies

May 22, 2023

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Gas prices in Pakistan may increase further in the next fiscal year, as the government considers allocating only Rs76 billion for gas sector subsidies in the new budget. This is significantly less than the Ministry of Energy’s demand of Rs230 billion.

The Ministry of Energy’s demand is based on the need to provide subsidized imported gas to domestic and industrial consumers and clear pending arrears. However, the government’s proposed allocation is approximately 66% less than what the Ministry of Energy sought.

The Rs76 billion allocation includes Rs20 billion in grants for the Reko Diq project to cover interest costs on a Rs65 billion loan. The government borrowed this loan to cover Balochistan’s share in the project.

The Rs76 billion allocation is also Rs256 billion less than the estimated gas sector subsidies for the current fiscal year. The Ministry of Finance, which initially allocated Rs74 billion, now estimates gas subsidies at Rs330 billion for this year. This figure includes the requirements of the Reko Diq project, which do not strictly fall under the category of subsidies.

The Ministry of Finance proposed the allocations for the fiscal year 2023-24 assuming that the Oil and Gas Regulatory Authority (OGRA) would timely determine the weighted average cost of gas (WACOG), by considering the price of local and imported gas.

However, if OGRA does not enforce the weighted average gas prices on time or takes longer than usual to determine the estimated revenue requirements for this and the next fiscal years, the gas sector’s circular debt will further increase. As of the last fiscal year, the stock of gas sector debt had surpassed Rs1.6 trillion.

The government recently raised gas prices in an attempt to eliminate the gas sector debt, but due to delays in implementation of decisions and low allocation, there may be a further increase in the debt. Companies like Pakistan State Oil (PSO), Sui Northern Gas Pipelines Limited (SNGPL), and Sui Southern Company Limited (SSGC) have been crippled financially due to non-payment of their dues.

The following are some of the potential consequences of the government’s decision to allocate less money for gas sector subsidies:

Increased gas prices for consumers, both domestic and industrial
A further increase in the gas sector’s circular debt
Financial difficulties for companies like PSO, SNGPL, and SSGC
A slowdown in economic activity due to higher energy costs

The government needs to take urgent steps to address the gas sector crisis. This includes increasing the allocation for gas sector subsidies, ensuring that OGRA enforces the weighted average gas prices on time, and taking steps to reduce the gas sector’s circular debt.