Author: Ibraheem Sohail

Business owners and citizens may witness yet another hike in fuel prices. According to reports, the prices of Petrol, High-Speed Diesel (HSD) and Kerosene are all expected to rise for the next fortnight on Friday.

Owing to higher international prices of petroleum products, experts are predicting a hike of up to six rupees per litre. Reports state that the ex-depot price of petrol may increase by a conservative three rupees per litre while HSD and kerosene prices may rise sharply – approximately six rupees.

The hike will increase the price of petrol to 256.13 rupees per litre while the official rate of kerosene will come to rest at 169.25 rupees per litre. HSD will be priced at an extortionate 260.95 rupees per litre.

These are only estimates, however, as actual prices depend on final calculations, which will be made on January 31. Analysts cite the expected rise in prices as being associated with the bullish trend in the international market.

Over the past two weeks, Brent prices have surged by two dollars per barrel to rest over $76. The resultant rise in the average price of HSD is projected to sit close to $2.5 per barrel. However, the increase in petrol prices per barrel was just half a dollar.

As per reports, the import premium on petrol has gone up to $8.84 after officials tacked on an additional 40 cents to the premium. However, import premiums on diesel and petrol have not been altered.

Islamabad charges a tax of approximately 76 rupees per litre on both HSD and petrol. The bulk of this tax, a staggering 60 rupees per litre, is charged under the category of ‘Petroleum Development Levy’ (PDL), whereas the other charge of 16 rupees goes towards customs duty fees.

Pakistan is a net importer of petroleum-based fuels. However, it produces some of its fuel, too. Interestingly, the customs duty is levied on fuel produced domestically as well.

Islamabad does not charge consumers General Sales Tax (GST) on any petroleum products. However, fuel suppliers and distributors tack on an additional 17 rupees on each litre as a markup.

The rise in petrol prices cannot be attributed to fluctuations in the rupee’s value, as the exchange rate has enjoyed relative stability for over a year now. This will reduce the impact of the rising petroleum import bill.

Business owners involved in fuel-intensive operations are expected to suffer. For instance, transportation companies will be hit hard by the HSD price hike as their operating costs will rise, causing their profit margins to shrink.

Foreign investment withdrawal picked up pace in Pakistan as investors pulled their funds out of treasury bills (T-bills). As per reports, investors withdrew 87 percent of their funds out of the economy owing to the recent trend of declining interest rates.

Investors do not consider the new profit rates to be attractive since they have dropped by approximately 50 percent over the past seven months. Profit rates on T-bills have declined as interest rates have been locked in freefall since June 2024 – dropping 1,000 basis points.

During the auction of T-bills held prior to the announcement of the interest rates, the return on six month T-bills was slashed down to just 11.4 percent which represents a 39 basis points cut.

Analysts claim that rates could fall by an additional 100 basis points. This might exacerbate the current issue pertaining to investment outflows as investors will consider parking their funds in other countries where profit rates are higher.

Inflows up to January 17 stood at $72 million while outflows for the same period exceeded $120 million. According to reports, this is not the first time where large outflows have been recorded as over four billion dollars left Pakistan within four months during Covid.

While plummeting interest rates spell great news for businesses, outflows of this magnitude usually apply a downward pressure on the value of the rupee. However, outflows were unable to significantly impact the exchange rate as the rupee remains stable.

Experts have claimed that factors other than declining interest rates could be responsible for foreign investors suddenly pulling their funds out of Pakistan. One of these is the looming possibility of further interest rate cuts in the economy.

Analysts are speculating that the State Bank of Pakistan (SBP) may slash interest rates following the next monetary policy meeting as the inflation rate stands at a controlled 4.1 percent. Further cuts will reduce the profit rates on T-bills yet again.

Data from the SBP revealed that during the first half of Fiscal Year (FY) 2024-25, T-bills have attracted a staggering $984 million. Outflows for the corresponding period stood dangerously high at $852 million.

Over a period of approximately seven months, while interest rates were declining, T-bill inflows from the United Kingdom (UK) stood at a respectable $630 million. This makes the British investors responsible for 64 percent of total T-bill inflows during the aforementioned period.

Reports highlighted how UAE, Bahrain and Australia also added to the T-bill inflow amounts over the past seven months. These countries are destinations for Pakistani migrant workers, partially explaining their motivations for investing in the country.

In a meeting with Ambassador Olaf Skoog, the European Union’s (EU) Special Representative for Human Rights, Commerce Minister Jam Kemal Khan, attempted to strengthen preexisting trade ties. Jam Kemal vowed to follow the 27 international conventions that allow Pakistan to remain the beneficiary of numerous trade benefits.

These benefits fall under the umbrella of the Generalized Scheme of Preferences Plus (GSP+) and are vital for the growth of Pakistani businesses and the economy. The minister explored further avenues of economic integration with the EU via increased trade and commercial cooperation.

As per the commerce ministry, officials from both sides discussed matters pertaining to the advancement of commercial benefits to Pakistan in exchange for Pakistan’s continued commitment to certain international conventions.

These conventions cover a broad range of issues, such as good governance, environmental standards, and human and labour rights. According to reports, Pakistan is already a signatory, and further assurances outline Islamabad’s commitment to following the rules in exchange for economic incentives.

The timing of the meeting is crucial as the United States (US) seems to be backing out of aid initiatives. President Donald Trump froze funding for all USAID initiatives while issuing directives to organisations working to halt their operations.

Donald Trump’s decision will significantly impact Pakistan’s economy as USAID was involved in numerous projects in the country. According to reports, USAID funds were being utilised to strengthen human rights, democracy and good governance.

The EU requires Pakistan to follow conventions that coincidentally are the ones that USAID was funding. With aid payments frozen, Islamabad may find it difficult to stay on the right roadmap, which could jeopardise concessions from the EU. As such, ensuring the continued economic support of the EU was necessary as a moratorium on concessions to Pakistan could significantly hinder economic growth.

In 2023, the EU’s parliament extended Pakistan’s GSP+ status until 2027, along with other developing countries. The four-year extension allowed for Pakistani exports to face minimum duty or even no duty on their products.

Data has revealed, however, that despite possessing this trade advantage, the export value of goods from Pakistan to the EU declined to $8.240 billion, which translates to a drop of approximately three percent.

The EU’s office in Islamabad announced that 30 percent of all Pakistani exports end up at the EU’s shores. This explains Jam Kemal’s comment regarding commitment to international conventions being ‘beneficial’ for Pakistan.

The commerce minister reaffirmed to follow through on all initiatives enacted by the Treaty Implementation Cell. The commerce minister’s efforts seem to have been convincing; however, many analysts are wondering if the EU will extend Pakistan’s GSP+ status when it nears expiration in 2027.

State-owned power distribution companies (Discos) have asked for substantial security deposit increases, which they want to raise by more than 400 percent for all consumers. As per reports, however, Islamabad is pushing for low industrial power rates and to ‘rationalise’ the tax burden on the salaried class.

Power companies have petitioned the National Electric Power Regulatory Authority (NEPRA) to raise security deposits substantially for customers in lower consumption categories. The proposed changes would base deposit amounts on asset values because electricity rates have risen by a staggering 300 percent since 2008.

The proposed per-kilowatt deposit increase from 1220 rupees to 5179 rupees would significantly raise upfront costs for consumers who need new connections, reconnections, or wish to change their tariff category.

During a Pakistan Business Council (PBC) event, Power Minister Awais Ahmad Khan Leghari revealed that multiple power projects had been launched without following the least-cost principle. According to reports, the government intend to tackle this issue by halting the purchase of electricity from new power plants starting in April while also hosting auctions to sell excess capacity.

The power ministry proposed industrial users pay electricity rates based on marginal costs and additional discounts for Greenfield projects, including data centres and IT businesses. The transition to a competitive electricity market will start in April and should fully implement itself within two to three years.

In order to combat the growing circular debt, Awais Leghari said that the government would conduct a review of tariffs surrounding nuclear power and hydropower facilities. According to him, industrial tariffs have declined by 11 rupees already, and more reductions could follow if Pakistan successfully negotiates better terms for the energy debt held by China.

The minister states that establishing a single national electricity rate is impossible because Pakistan needs to advance its privatisation efforts. Reports indicate that eight out of ten DISCOS will transition to private management during the following two to three years.

Finance Minister Muhammad Aurangzeb, also present at the PBC event, declared that salaried people face extortionate taxes, which require immediate easing. Reports suggest that tax slab modifications face uncertainty because of Pakistan’s ongoing International Monetary Fund (IMF) program however, officials are working to simplify the tax filing system. He outlined how Islamabad aims to eliminate the need for tax consultants by developing simpler procedures for tax compliance.

Muhammad Aurangzeb expects that policy rates will continue to decrease because inflation is projecting a downward trend. Data shows that large businesses have obtained financing at rates below 11 percent while foreign exchange reserves now stand at $13 billion.

The current level of reserves provides three months of import protection, which is better than what analysts had predicted earlier based on old reserve amounts. He emphasised that these advancements create essential conditions for Pakistan’s credit rating improvement.

The State Bank of Pakistan (SBP) cut its policy rate on Monday by 100 basis points, bringing the interest rate to just 12 percent. However, members of the business community expressed their dissatisfaction with the cut as they believe it does not match the decline of inflation in the economy.

Prior to the Monetary Policy meeting, business owners insisted that the SBP slash its policy rate to single digits. Industry representatives believe that the country can’t grow efficiently, with interest rates sitting above 10 percent.

Martin Raiser, South Asia’s Vice president at the World Bank, mentioned Pakistan’s inability to grow if it does not boost investment levels. The meagre cut in interest rates may prove the senior official’s remarks correct, as a small cut might not be able to spur a significant amount of investment within the economy.

President Atif Ikram Shiekh of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) mentioned a premium of 7.9 percent, as the inflation rate istands at just 4.1 percent. The premium is the gap between the interest rate and the inflation rate in the economy.

The SBP’s conservative behaviour represents their commitment to lowering inflation rates, as the current policy rate is curbing excessive borrowing by businesses and industries alike.

FPCCI initially wanted the SBP to slash the interest rate by five percent, which would have helped Prime Minister Shehbaz Sharif’s plan to revive the economy. This would have lowered the premium down to a more reasonable 3.9 percent, allowing more businesses to borrow funds for expansion purposes.

As per reports, the chamber’s request for a large cut in interest rates was made to align the new monetary policy with initiatives from the Special Investment Facilitation Council (SIFC).

The demand for a cut is not meritless, as core inflation is reported to drop to as low as three percent in January. This drop can be associated with the high rates of interest and the stabilisation of oil prices in the global economy.

While rising inflation levels are harmful to the economy, disinflation can detrimentally affect the economy too. President Muhammad Jawed of the Karachi Chamber of Commerce and Industry commented on how the SBP has kept interest rates high despite Shehbaz Sharif assuring that the rates would drop.

While the low cut displays the SBP’s lack of urgency in aligning the monetary policy with Shehbaz Sharif’s aims, the Prime Minister can not be held liable as the SBP is an independent body free from government influences.

Analysts are predicting a further cut in the interest rates in the coming periods, which may grant business demands of single-digit rates soon enough.

Islamabad has revealed that two of Pakistan’s three major economic sectors contracted, with the industrial and agricultural sectors showing lower growth rates compared to targetted levels.

The Ministry of Finance (MOF) released its biannual State of Economy Report, which associated the slow growth rates in agriculture with the decline of cotton, maize, sugarcane and rice yields. Data from the report revealed that growth in important crops shrank by upwards of 11 percent during the first quarter of the year.

Cotton production dropped by almost 30 percent, while Maize yields recorded a decline of about 16 percent. Rice and Sugarcane yields declined marginally, posting a drop of 1.2 percent and 2.2 percent, respectively.

Furthermore, according to the report, the slowdown could be a result of the high ‘base-effect’ in the sector because of the last fiscal year. For reference, the base effect is a statistical phenomenon where growth in the current period seems to be subpar because of the exceptional growth rate a sector experienced in the previous period.

While the report highlights the negative growth rate in Pakistan’s industrial sector, it also downplays the severity by mentioning that the rate of contraction declined from 4.43 percent in the previous year to a little over one percent.

The ‘gradual improvement’ stated in the report is a result of moderation across sectors such as the agricultural sector.

According to reports, the government commented on how well Pakistan is positioned to post higher growth rates in the current year because of a multitude of reasons. These reasons stem from Islamabad’s efforts to consolidate fiscally while stringently following the targets set by the International Monetary Fund (IMF).

Furthermore, the State Bank of Pakistan’s (SBP) implementation of an expansionary monetary policy might boost growth rates to respectable levels. The SBP has been able to cut its policy rate by a staggering 1,000 points as it has successfully controlled the rate of inflation in the economy.

As per reports, global commodity prices have declined steadily allowing for Pakistan’s exchange rate to stabilise. Analysts are citing these factors as reasons for anticipating a possible growth surge in Pakistan.

Moreover, the report highlighted that the existence of a ‘more favorable environment’ for both consumer and industrial sectors is going to help fast-track economic growth.

Amid the plethora of negative news, Islamabad was able to find the silver lining in the statistics. Remittance inflows and foreign direct investment (FDI) helped keep the current account balanced. According to reports, businesses in energy and Finance have witnessed a 20 percent growth rate because of FDI.

Electricity consumers with rooftop solar installations may be struck hard as Islamabad is preparing to replace the existing net-metering system with a gross-metering system. According to reports, the rooftop solar buyback tariff could be revised soon as net-metering has imposed a financial burden of 103 billion rupees on grid consumers.

If Islamabad approves the proposed policy, users of the national grid will buy electricity from rooftop solar power producers at approximately eight rupees per unit. The proposed price will be 160 percent lower as the current price that net-meter owners get is 21 rupees per unit.

The move will significantly hurt users who have installed solar panels in the past few months as it will take approximately five years to recoup the investment amount. For reference, the time frame to breakeven on solar investments under the current policy is just 18-24 months.

Under the current system, net-meter owners provide excess electricity to the national grid for 21 rupees per unit and buy it back at 42 rupees per unit. This has disproportionately benefitted households with large solar panel installations as they consistently provide more power to the grid compared to their consumption.

As per reports, this has resulted in a shifting of costs to those who do not have solar installations. Documents from the Power Division have revealed that under the current policy, tariffs have increased for underprivileged consumers by over one rupee per unit.

The proposed changes will implement a gross-metering system, which means net-meter holders will no longer be able to achieve zero electricity bills. This is because in a gross-metering system, power from solar panels must be routed to the national grid and must be bought back from the grid for consumption.

The current policy is favorable for net-meter owners as consumers are allowed to divert power from their panels to household consumption and only export surplus power to the grid. This mechanism allowed for solar users to consistently witness zero or extremely low electricity bills.

Data from the Power Division revealed that solar capacity rose from 321 Megawatts in 2021 to 3,277 Megawatts by 2024. This rise has been witnessed because of an increase in net-metering connections.

Currently, there are 226,400 net-meter owners in Pakistan which translates into just 0.6 percent of electricity users. Analysts fear how high tariffs on underprivileged consumers could rise because of the rising trend of solar power adoption.

Officials have warned that the financial burden on grid users could cross half a trillion rupees over the next decade if regulations are not passed. Islamabad will finalize a plan to tackle the ‘problem’ of net-metering and rooftop solar plants by February.

Islamabad has amended two parliamentary acts allowing the commerce minister to grant one-time import and export waivers. Previously, this power could be exercised only by the federal cabinet to prevent its misuse.

The exemptions can be applied to any type of good, but their primary use is expected to be reserved for vehicles. Parliament passed the bills in 2023; however, then-President Dr Arif Alvi refused to sign them. According to reports, his decision was based on the fact that the commerce minister was not allowed to exercise cabinet power.

President Asif Ali Zardari, however, has signed the bills to complete the motion set forth by the parliament. The decision took effect immediately, meaning that the commerce minister can exercise this authority from today on.

Reports also revealed that exemption requests will be granted only in certain circumstances where trade outcomes will serve to benefit commercial activities. The commerce minister can issue exemptions by writing an official notification along with reasons for granting the exemption.

The exemption will grant traders the permission to export, re-export, import or re-import goods without facing any restrictions. Analysts have outlined the importance of stringent vigilance surrounding the exemption process, as a misuse of authority could allow for certain goods to enter Pakistan that violate the law.

Reports have highlighted that this power was initially transferred to the federal cabinet to provide more oversight over the exemption process and ensure that it was used for genuine situations only.

Prior to the amendment, the commerce ministry had to request approval from the federal cabinet. While this allowed for more transparency, cases would not always get reviewed immediately.  The commerce ministry has outlined the importance of being granted this authority as it will help expedite the import process.

A vast majority of cases that require exemptions surround the import of automobiles into the country, as a small fraction of cars violate the Import Policy Order.

Experts are speculating that misuse of authority could cause a slight reduction in the demand for locally assembled cars. Since the import process has become more streamlined, Pakistan could see a rise in the import of vehicles. This poses a significant threat to local automobile giants such as Toyota Indus, Honda Atlas and Suzuki Motor Company.

Reports have revealed that the act also allows the secretary of commerce and director general of trade organisations to oversee the daily operations of traders. Essentially, the commerce division can now make decisions that will affect industries across Pakistan.