petroleum ministers diagnosis

Petroleum Minister’s diagnosis & indictment

Federal Minister for Petroleum Ali Pervaiz Malik has made an unusually candid assessment of Pakistan’s energy sector. Speaking at the Energy Conference 2026, he conceded that inconsistent policies discourage exploration, petroleum has been subjected to “exorbitant taxation”, domestic refineries remain in a dilapidated condition, gas-sector liquidity is impaired, circular debt remains a central concern, and structural reform requires competition, unbundling and private participation.

These admissions deserve attention because they come from inside the government. They also raise an unavoidable question: if the government understands the structural weaknesses so clearly, why does its own fiscal and administrative policy continue to aggravate them?

The minister’s strongest observation was that the Petroleum Division cannot remain the instrument upon which excessive taxation and financial interventions are loaded merely to meet budgetary requirements. The diagnosis is correct; the choice of victim is not. A government division does not bear taxation. Consumers, farmers, transporters, manufacturers and exporters do.

Pakistan collected a record Rs. 1.567 trillion through petroleum levy during the fiscal year (FY) 2025-26, exceeding the budgeted target by about Rs. 99 billion. Petroleum products are nominally exempt from general sales tax, but motorists should not confuse exemption with relief. The levy, customs duty and the new climate support levy together impose an enormous burden at the pump

An analysis of notified prices and consumption estimated that these petroleum charges generated around Rs. 166 billion in July 2026 alone—equivalent to roughly one-fifth of that month’s collection of Federal Board of Revenue (FBR). On petrol, government imposts exceeded Rs. 100 per litre during parts of August. [Ministry of Finance fiscal operations; OGRA notified prices]

This is not energy policy. It is fiscal opportunism. Petroleum levy is especially attractive to Islamabad because, unlike federal taxes included in the divisible pool, its proceeds are retained by the federal government. Replacing sales tax with levy does not broaden the tax base or improve its progressivity [Bankruptcy of ideas—VII: The Petroleum (Levy) State, June 18, Minute Mirror, 2026].  It merely enables the federation to collect revenue without sharing it under the National Finance Commission mechanism. Provinces lose their constitutional share while the entire economy absorbs higher transport, agricultural and production costs.

The levy is also excessively regressive. A litre consumed by a motorcyclist, rickshaw driver or small farmer attracts the same fixed charge as one consumed by the owner of a luxury vehicle. Diesel taxation travels through freight into the price of flour, vegetables, medicines and construction materials. The poorest household may not own a vehicle, but it still pays petroleum levy indirectly on almost everything it buys.

The minister should have said plainly that Pakistan’s narrow and inequitable tax system is being sustained by taxing mobility and production. Powerful retailers, speculative real-estate interests, large landowners and beneficiaries of untaxed or lightly taxed wealth remain inadequately documented. The salaried class, formal businesses and petroleum consumers are repeatedly squeezed because they are visible and collection is easy.

The minister also called for consistent and predictable policies to attract investment in high-risk onshore and offshore exploration. No serious investor can disagree. Exploration requires large sunk expenditure, long lead times and the possibility of complete failure. Pakistan cannot invite investors with one policy, reinterpret its terms through another notification, delay payments, restrict remittances and then wonder why exploration interest remains weak.

The Pakistan Economic Survey 2025-26 acknowledges constrained domestic petroleum production, continued import dependence, suboptimal refinery utilisation and the effect of international instability on the import bill. These are not new discoveries. Governments have been promising energy security, refinery upgrading and accelerated exploration for decades. The institutional cycle remains familiar: announce a policy, delay agreements, accumulate liabilities, offer concessions, change fiscal terms and launch another policy.

Offshore exploration is important, but it must not become another slogan. A dry well is a commercial risk; unstable contracts, delayed decisions and politicised administration are sovereign risks created by the state. Pakistan cannot remove geological uncertainty, but it can remove bureaucratic caprice. That requires published contractual frameworks, credible dispute resolution, transparent bidding, assured repatriation rules and protection against retrospective fiscal changes.

The minister’s claim that the flow of circular debt has been maintained near zero without increasing consumer prices also needs closer examination. Circular debt is not eliminated merely because its current flow is temporarily contained. Arrears can be shifted through subsidies, delayed payments, financing arrangements, tariff adjustments, accounting recognition or government guarantees. The stock remains a claim on citizens even when it disappears from a ministry’s preferred flow indicator.

Gas-sector circular debt reflects delayed tariff adjustments, expensive imported LNG, diversion of gas between consumer categories, distribution losses, theft, weak recoveries, unpaid subsidies and government-directed supplies without timely budgetary compensation. It impairs the liquidity of exploration and production companies, which then lack funds for new exploration. The state taxes petroleum to repair its budget while withholding or delaying money owed within the energy chain. This is fiscal cannibalism: one part of the sector is consumed to keep another functioning.

The condition of local refineries provides another indictment. The minister rightly asked why they remain “dilapidated” and have not become deep-conversion facilities. Old hydro skimming refineries produce an output mix increasingly misaligned with domestic demand, including excess furnace oil and insufficient quantities of cleaner, higher-value fuels. Modernisation requires billions of dollars, technological planning and certainty over tariffs, duties, pricing and product specifications.

Refineries, however, have enjoyed various forms of protection and deemed-duty support in the past. Any new incentive must be conditional. Public support cannot become a permanent reward for postponing investment. 

Each refinery agreement should disclose the investment commitment, financing plan, completion milestones, product-quality improvements, environmental obligations and consequences of default. Consumers should not finance refinery upgrades through protected margins without enforceable delivery.

The proposed unbundling of the gas sector—separating infrastructure from commodity trading—can improve transparency. An independent network operator, regulated access charges and genuine third-party access could allow producers and large consumers to contract without forcing every transaction through an opaque state monopoly. But changing organisational boxes will not cure political pricing, excessive losses, poor metering or regulatory capture.

Competition requires more than announcing deregulation. Pipeline access must be nondiscriminatory; capacity allocation and tariffs must be public; OGRA must possess real autonomy; dominant incumbents must not decide which competitors receive access; and low-income consumers must be protected through direct, budgeted assistance. Deregulation without these safeguards can replace a public monopoly with a private oligopoly.

The minister thanked the World Bank for supporting unbundling and reform. Technical assistance can help, but Pakistan has accumulated shelves of donor-financed energy studies. Its principal deficit is not diagnosis. It is political willingness to confront beneficiaries of inefficiency, disclose contractual obligations, stop using tariffs and levies as off-budget fiscal instruments, and subject every subsidy to parliamentary scrutiny.

A Cabinet Committee on Energy meeting every two months may improve coordination between petroleum, power and finance authorities. Committees, however, cannot substitute for an integrated energy policy approved after public consultation and supported by measurable targets. 

Petroleum, gas and electricity cannot be managed as separate ministerial estates. Pricing decisions in one segment create liabilities in another; imported LNG affects electricity costs; rooftop solar alters grid demand; refinery configuration influences imports; and petroleum taxation affects the entire productive economy.

Ali Pervaiz Malik has identified much of the disease. His government now stands accused by its own diagnosis. Sustainable reform demands a transparent reduction in petroleum dependence, progressive taxation of income and wealth, settlement of verified energy-chain liabilities, conditional refinery modernisation, competitive gas-market rules, independent regulation and complete disclosure of circular debt.

Future generations, whom the minister invoked, will not judge this government by the number of committees it revived or policies it announced. They will ask whether it dismantled the system that taxes energy to conceal fiscal failure, socialises institutional losses and calls the resulting burden reform.

________________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, writer, literary critic, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996. 

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  • Beyond Public Finance: Towards Constitutional Poli…

    The fifth part of this series examined how Pakistan’s strategic location, domestic privileges and recurring external assistance have produced a rent-based political economy. The state has repeatedly obtained temporary relief without undertaking the constitutional and productive transformation required for genuine economic independence. Professor Ehtisham Ahmad’s proposed monograph, Can Pakistan evolve from a dependent “buffer state”? (shared with many including me), raises the right question at the right time. Unlike conventional reports that treat Pakistan merely as an under-taxed developing economy, he recognises the historical relationship between strategic rents, external dependency, fiscal weakness and recurring recourse to the International Monetary Fund (IMF) and other lenders. His central concern deserves serious engagement rather than routine approval or dismissal. This part is humble attempt to analyse his proposed monograph. Ehtisham Ahmad argues that Pakistan’s geographic position has periodically enabled it to obtain external assistance as a frontline or buffer state. During the Cold War, the Afghan conflict and the post-9/11 period, strategic usefulness generated substantial inflows. When geopolitical support receded, the IMF and multilateral institutions frequently stepped in to fill the breach. His published study, ‘Political Economy of Tax and Digital Transformations in Pakistan’, similarly connects Pakistan’s stop-go aid experience with its failure to undertake sustainable domestic resource mobilisation.  This is an important advance over revenue-only analysis. Pakistan’s persistent dependence cannot be explained simply by weak tax administration, low compliance or insufficient technical capacity. External rents have reduced the immediate pressure to negotiate a durable fiscal settlement with citizens. They have also strengthened institutions positioned to manage Pakistan’s strategic relationship with external powers. Ehtisham Ahmad is equally persuasive in identifying serious defects in Pakistan’s tax structure. He correctly criticises the conversion of value added tax (VAT) into a production excise, the proliferation of exemptions, the destruction of the invoice chain, cascading, excessive withholding taxation, nuisance levies and the absence of an arms-length administration. His insistence that taxation must be linked with growth, investment, distribution and political economy is entirely justified. His criticism of digitalisation without comprehensive change management is also timely. Computerising defective procedures cannot cure the institutional incentives that produced them. Linking identity numbers, tax registrations, invoices and financial information may improve enforcement, but technology cannot decide whether the law will be applied equally. These insights substantially overlap with the argument developed in this series. The difficulty arises at the next stage. Ehtisham begins with a powerful political-economy diagnosis but gradually returns to a largely public-finance remedy. Pakistan is first presented as a security-dependent buffer state; its continuing weakness is then explained mainly through the Government of India Act 1935, fragmented tax assignments, a split VAT, inadequate provincial own-source revenue and incomplete digital transformation. The analytical journey moves from geopolitics to tax architecture too quickly. Pakistan is not dependent merely because it has a badly designed VAT or an inefficient division of taxing powers. Its tax system has itself been shaped by the distribution of political, institutional and strategic power. Exemptions, withholding taxes, petroleum levies, blocked refunds and arbitrary concessions are not accidental departures from an otherwise neutral system. They reflect bargains through which burdens and benefits are distributed. Fiscal design matters greatly. It cannot by itself explain why successive governments have preserved arrangements that are demonstrably damaging to growth, documentation and equity. Ehtisham assigns considerable importance to the Government of India Act 1935. The Act undoubtedly institutionalised a colonial distribution of legislative and fiscal authority. It divided functions between the centre and provinces while reserving decisive powers for the Governor-General and provincial governors. Its legislative lists influenced the constitutional development of both India and Pakistan.  Colonial inheritance, however, cannot become a substitute for analysing postcolonial responsibility. Pakistan adopted constitutions in 1956, 1962 and 1973. It experienced repeated military interventions, the dismemberment of the country in 1971, presidential centralisation, uneven National Finance Commission Awards, extensive constitutional amendments and decades of external security alliances. Each period involved decisions made by domestic actors possessing agency, interests and power. The present Constitution of 1973 is not pari materia to “1972 Constitution”. The Interim Constitution operated in 1972, whereas the permanent constitutional settlement reached on April 10, 1973. The 1973 became operative from August 14, 1973. This is more than a matter of nomenclature. Pakistan’s fiscal federalism must be examined through the constitutional bargain consciously adopted after the catastrophe of 1971. The Constitution (Eighteenth Amendment) Act, 2010 also cannot be treated simply as Pakistan “doubling down” on the colonial arrangements of 1935. It was a democratic response to prolonged centralisation and an attempt to restore parliamentary federalism, provincial autonomy and the original character of the 1973 Constitution. Problems created by the division of sales tax on goods and services are real. Businesses should not be subjected to multiple registrations, conflicting interpretations, fragmented audits and unnecessary compliance costs.  A common base, harmonised definitions, integrated information, a clearing mechanism and coordinated administration are all necessary. Coordination need not mean re-centralisation. Pakistan’s federation cannot be redesigned solely for the convenience of tax administrators. Fiscal arrangements must also preserve provincial autonomy, democratic accountability and the lessons of constitutional history. A technically elegant centralised system may produce serious political and constitutional costs if imposed without consent. Ehtisham’s historical thesis requires similar caution. He suggests that the British deliberately sought to create a weak and dependent buffer state along the Indus to preserve strategic influence in the continuing “Great Game”. This is a significant hypothesis, deserving investigation through archival evidence. It should not be presented as settled history without fuller documentation. The official Cabinet Mission statement of May 16, 1946 expressly declined to recommend the transfer of power to two completely separate sovereign states. It proposed a Union dealing with foreign affairs, defence and communications, while residuary powers would remain with the provinces and provinces could form groups.  The document may be interpreted in different ways, but its stated scheme was for a united, highly decentralised India rather than the immediate creation of a separate buffer state.  Claims that the NWFP (now Khyber Pakhtunkhwa) referendum was secured through ballot stuffing, that

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