Economics of blame game in Pakistan

While prices of kerosene oil and light diesel oil have been raised by Rs3.50 per litre, even now the government is still providing a subsidy of Rs16.82 per litre on kerosene oil and Rs15.30 per litre on light diesel oil
By Mehmood-Ul-Hassan Khan

It was long expected and this week it happened, the POL prices have gone up again. It is the start of a vicious circle of the blame game theory. The Oil and Gas Regulatory Authority (OGRA) has increased the petroleum products’ prices, which will be effective for the fortnight, of March 1 to March 15. The petrol price has been raised from Rs53.70 per liter to Rs58.70 per liter, diesel from Rs32.57 per liter to Rs36.07per liter, kerosene oil from Rs35.23 per liter to Rs38.73 per liter and HOBC from per liter Rs64.88 to Rs69.88 per liter. It would help to reduce the ongoing-subsidy of Rs17 billion by Rs3.50 to Rs4 billion per month. According to the government officials it is unavoidable because the oil prices in the international market showed a record surge during the last several months and surpassed to $100 per barrel and reached to $103 per barrel. According to the notification of the OGRA the petrol and HOBC prices have been raised by Rs5.00 per liter, while prices of kerosene oil and light diesel oil have been raised by Rs3.50 per liter. Even now, the government is providing a subsidy of Rs16.82 per liter on kerosene oil and Rs15.30 per liter on light diesel oil, after the price increase.

Increase in power tariff

The government also raised the power tariff by 9 per cent i.e. 38 paisa per unit for consumers of the eight power distribution companies. According to the government it has no other viable option because the subsidy of Rs58 billion would reach Rs82 billion. The increase in the power tariff would fuel the inflation bomb especially the food inflation which has been in the range of 12-11 per cent for the last many months.

Surge in inflation

According to the Federal Bureau of Statistics (FBS), the weekly inflation measured through the Sensitive Price Index (SPI), increased by 12.16 per cent over the week.

The double-digit increase in SPI has been recorded on the increase in the price of 24 daily kitchen items during the week under review. The impact of the increase in SPI was hard-hitting for the lower income group as compared to the rich people. The SPI witnessed an increase of 15.26 per cent and 14.73 per cent, respectively, for household goods in the two lower income brackets of up to Rs3000 and Rs3001-5000. For household goods in the income brackets of Rs5001-12000, the increase in the SPI was in the range of 13.29 per cent while for household goods in the income group basket of over Rs12000, the inflation registered a growth 10.08 per cent over the week last year. As compared to the previous week, the SPI, however, registered an increase of 0.35 per cent for almost all income groups and the recent increase in oil and electricity tariff

According to the National Electric Power Regulatory Authority (NEPRA) there will be on change up to 50 units. (See table)

Widening oil import bill

The import bill of oil has reached $5.2 billion in the current fiscal year. It has widened the current account deficit which is causing serious budgetary deficit. According to the latest report of the Merrill Lynch (2008) Pakistan would miss its current account deficit target and it may be 6.5 per cent of GDP as against the target of 5 per cent during the current fiscal year 2008 due to slow export growth and rising imports.

It is estimated that the country has to face a deficit of $10.5-11 billion during the current fiscal year 2008, while earlier it was projected at $9 billion. SBP says that at the current rate, the deficit during 2007-08 may easily surpass $12 billion or about 7.0 per cent of GDP, and in all probability, the problem could even worsen in the coming months due to the persistence of high oil prices in the international market at around $100 per barrel and acute energy shortages in the country. According to the latest report of the ADB (2008) that the continuation of the tight monetary policy, high international oil prices, and slow export growth is expected to the curb GDP growth this year to 6.5 per cent.

The report projects that the current account deficit to remain high at 5.5 per cent of GDP in Pakistan.

According to many economists there will be a direct impact of the oil price hike on the transport sector which will raise the transport charges and cause an overall price hike in the country. It would increase the burden on the people. All the main stakeholders showed their concerns on the increase of the oil and power tariffs. It would further increase the cost of production.

Integrated strategies

(a) Increase in inflow of funds, FI, FPI, workers remittances, and speeding up of a joint venture.

(b) Good governance and saving from the different resources and sources e.g. not to purchase the new lavish cars for the new federal and provincial cabinets.

(c) Enhancing the human resource development investment.

(d) Sccountability, recovery of non-performing loans and establishing of immaculate financial administration.

(e) The estimated Rs160 billion liability on the account of the subsidy needs to be shed by applying prudent economic principles rather than going for commercial bank borrowing i.e. paying Rs54 billion for Rs38 billion in three years.

Concluding remarks

International oil prices are going higher and higher. It will be on the higher side throughout the 2008 due to many reasons the weakening of the dollar, recession in the US economy and the surge in international gold prices is supposed to be one of three main reasons.

Only political wisdom, sincere leadership, honesty, and the approach that would be ideal is to negate the multiple bad affects due to the increase in oil and utility bill prices.

Name of the company          Increase (paisa) per unit

Peshawar Electric Supply Company          70

Quetta Electric Supply Company          59

Hyderabad Electric Supply Company          59

Islamabad Electric Supply Company          49

Multan Electric Power Company          48

Gujranwala Power Company          47

Faisalabad Electric Supply Company          44

Lahore Electric Supply Company          38

Courtesy: The News, 3/3/2008