- Rupee’s Decline against US Dollar Triggers Inflation and Fuel Price Surge.
- Weakening Rupee Amplifies Electricity Rates and Quarterly Adjustments.
- Uncontrolled Dollar Rise May Lead to Ongoing Tariff Increases in Pakistan.
The ongoing decline of the Pakistani rupee against the US dollar is anticipated to trigger a fresh wave of inflation in the country. This depreciation is poised to result in a surge in petroleum product prices, with expectations of an increase of over Rs13 per liter in the forthcoming price review scheduled for August 31.
As of August 24, the exchange rate between the rupee and the dollar has escalated by Rs12.08 since August 16, 2023. Consequently, starting from September 1, fuel and diesel costs are projected to rise solely due to this currency exchange fluctuation.
It’s noteworthy that global prices for petroleum products (POL) and crude oil have remained relatively stable. However, with just six days remaining in the current fortnight, the value of the dollar is predicted to continue its ascent.
Over the past two weeks, petrol prices have already climbed by Rs37.50 per liter, while diesel prices have surged by Rs40 per liter. Presently, the interbank value of the dollar has surpassed Rs300, while the open market value stands at Rs314.
Procuring crude oil and POL products at higher dollar values is poised to drive an additional increase in petrol and diesel prices during the initial two weeks of September, possibly reaching double-digit figures according to sources within the industrial sector.
Calculations based on the August 24 dollar value indicate that petrol could rise by Rs9.95 per liter, and diesel could see an increase of Rs13.73 per liter. However, if the dollar’s ascent persists and is allowed to float freely in the next seven days, the price surge for POL products might enter double-digit territory.
Moreover, there has been a 10% increase in LC (Letter of Credit) confirmation charges, which have risen from 0.5-1% compared to two to three years ago.
Despite this scenario, Finance Minister Shamshad Akhtar and the central bank appear to be unfazed and have not taken any measures to curb the strengthening US dollar, as per the terms of the $3 billion loan from the International Monetary Fund.
The repercussions of the dollar’s appreciation will also manifest in higher electricity rates due to monthly fuel adjustment costs and quarterly tariff revisions.
Simultaneously, the National Electric Power Regulatory Authority (NEPRA), in consultation with the Ministry of Finance and the Power Division, has already raised the base price for various consumer categories by Rs3 to Rs7.50 per unit. The base tariff for FY24 was initially set at Rs287, factoring in a 17% inflation rate, which now seems far from realistic given the interbank value of the dollar reaching Rs300.33 and inflation at 28%.
The questionable base tariff, computed at a lower dollar value, would lead to tariff hikes every month under the Fuel Cost Adjustment (FCA) category and every three months under the Quarterly Tariff Adjustment (QTA) category. This situation is likely to impose additional financial strain on citizens.
Due to the FCA adjustment in July 2023, the government has indicated its intention to raise the tariff by Rs2.07 per unit.
As per regulations, fluctuations in fuel prices are passed on to consumers. NEPRA is expected to soon announce its decision regarding the impact of the last quarter of FY23 on tariffs. The government is seeking a tariff increase of Rs5.40 per unit for the final QTA of FY23 and aims to recover this impact over three months.
To mitigate the price shock for the public, the government intends to spread the impact of the last quarter adjustments of FY23 over the six months of the upcoming winter season, starting from October 2023 to March 31, 2024. This approach would reduce the impact to Rs2.31 per unit, as the impact of the third quarterly adjustment FY23 of Rs1.24 would conclude in September 2023.
During the winter season, electricity consumption typically drops to 10,000 to 12,000 MW, leading to lower bills. Consequently, the government plans to pass on the impact of the last quarterly adjustment of FY23 to consumers during the six months of the impending winter season.
However, considering the uncontrolled depreciation of the rupee, Pakistani consumers may encounter additional tariff increases on a monthly basis throughout the current fiscal year 2023-24 under the FCA category, in addition to the four tariff adjustments scheduled under the Quarterly Tariff Adjustment.