Emerging socio-economic tsunami

Once again, the Oil and Gas Regulatory Authority (OGRA), on the approval of the federal government, announced an extraordinary increase in fuel products for the fifth time. The prices of gasoline, high octane, blended fuel, kerosene and high-speed diesel were increased by Rs10.97, Rs11.25, Rs8.20, Rs7.23 and Rs9.50 per litre respectively. After the most recent upward increase the new prices of fuel products will be: motor gasoline Rs86.66; high octane Rs96.08; kerosene Rs58.37; and light diesel oil will be available at Rs56.50.  The government justified the increase by saying that it was still giving 40 per cent subsidy on petroleum products to the masses. Defence Minister termed it effective tool for curbing smuggling ratios of petrol and diesel to Iran and Afghanistan. 

The general reaction was severe and people considered it anti-people. The business community labeled it anti-investment and anti-business. Industrialists, exporters, manufacturers and traders rejected the latest high increases in the POL products. The general public is burdened from all sides and there seems no hope for immediate relief in the near future. The prices of essential items skyrocketed and the government miserably failed to control the price hike, in fact kept on increasing the prices knowing that the life of poor masses would face more difficulties on top of the ones already being faced.

 

Government’s plea

 (a) Due to scarcity of the financial resources and limited alternative options, the government has no money to pay for subsidies. The government is providing Rs30 billion subsidy on POL products on monthly basis and making a collection of Rs13 billion general sales tax on the sales of POL products, which results in a net subsidy of just Rs17 billion. Recently, the government has negotiated with the Saudi government, oil facility for three years which implies that Pakistan would be paying for oil in three years time instead of as and when oil is purchased from Saudi Arabia.

(b) Widening deficit financing because of expenditures being greater than income or receipts, the expected release of World Bank budgetary support may have problems.

(c) According to the SBP report (2008), during the last fiscal, the country has spent over 11 billion dollars for oil import as the prices of crude oil are on the rise in the world market and just recently touched a new peak of 145 dollar per barrel before coming down. From 14 July till 25 July the price of a barrel of crude had decreased by more than 10 per cent which had led to the availability of cheaper gasoline and diesel prices in the US market. It is now traded at $124 per barrel.

(d) Poor fiscal management of the pervious government and new government’s strategy to reduce the overall budgetary deficit in the days to come does not seem to be working.

(e) Borrowing from the central bank and commercial banks to meet the expenses is not the answer.

(f) Borrowing from abroad (WB & IMF) to pay for these subsidies in the past year has made the matters worse.

(g) Controversial fuel pricing needs to be addressed to determine a fair policy and price mechanism. The government allowed oil refineries a 10 per cent reduction in duty for a year to increase strategic reserves and to improve product quality to Euro standards. The oil refineries have not achieved anything in this regard, as was expected, and continue to enjoy the benefits from price hike. There is a dichotomy in the price, tax, and commission mechanism of diesel and furnace oil, which needs immediate response from the government.

(h) According to the Economist, London (July 2008) high oil prices are fueling one of the biggest transfers of wealth in history. Oil consumers are paying $4 billion to $5 billion more for crude oil every day than they did just five years ago, adding more than $2 trillion into the profit of oil companies and oil-producing nations this year alone; Pakistan is not any exemption too.

(i) Refinery profits, OMC margin, dealer commission, transportation charges, evaporation losses, insurance and banking costs should be restructured and reexamined. The government is under pressure from the World Bank to zero down the subsidies of Rs400 billion in the current fiscal year.

 

Multiplier effects

The transport sector announced the complete strike as protest against the rapid increase in the prices of POL products.  According to estimation, the country suffered a loss of Rs1647 million as 40 to 45 per cent industrial units in Korangi and Site industrial areas remained closed owing to transport strike and workers failure to report on duty.

The industrialists claimed that the losses included Rs1400 million production losses, Rs150 million export losses and Rs107 million revenue loss. (see table)

High prices of POL product has further speeded-up the inflationary trend in the country. The highest-ever rise in petrol and diesel prices has resulted in the increase of Rs2 per kg on essential commodities like pulses, sugar, rice, tea etc. It is predicted that the prices of commodities would rise by at least 15-20 per cent in coming days.

Pakistan Railways has increased its fares by 10-15 per cent. PIA has enhanced its charges/fares by Rs1500 domestically. The president of Islamabad Chamber of Commerce and Industry (ICCI) says the recent price hike in POL product will make life of the common people more miserable and dependent. 17.4 per cent per litre raise in kerosene price would directly affect the poor, who use the fuel for cooking purposes.

The majority of the businessmen and industrialists said $22.1 billion export target would be difficult to achieve under the prevailing serious economic crisis following soaring oil prices and mounting inflation. It would badly hit the national economy besides enhancing the rate of unemployment. Transport fare and freight would add to the production cost of exportable items and it would be difficult to compete in the international market.

    

Widening of current account deficit

According to the recent statistical data of the SBP(July 2008) the country’s current account deficit has widened by 103 per cent at all time high level of 14 billion dollar during the fiscal year 2008, as compared to 6.87 billion dollar in 2007.

 

Main factors

(a) Trade deficit by 15.28 billion dollar

(b)  Services deficit by 6.302 billion dollar

(c) Income sector which has the highest ever deficit of 3.905 billion dollar

(d)  While, the overall deficit including trade, services and income stood at 25.48 billion dollar against the current account transfers of 11.619 billion dollar.

(e) High oil prices in the international markets. (Import of over 11 billion of oil in the pervious fiscal year)

(f) The slow privatisation process due to the political instability and financial crunch in the international market has also reduced the foreign inflows.

Diminishing Foreign investment

According to the latest report of the SBP(July 2008), net foreign investment declined by 38 per cent during last fiscal year due to massive outflow of portfolio investment on account of political uncertainty. The latest report showed overall $3.23 billion decline in the foreign investment during the fiscal year. Foreign investment (FI) stood at $5.193 billion as compared to $8.42 billion during 2006-07. Statistics showed that FDI declined by 0.3 per cent, while portfolio investment decreased by 98.8 per cent. Decline in portfolio inflows, as the foreign investors were reluctant to invest in the equity market due to political uncertainty and negative reports regarding country’s stock markets were account for decline in the foreign investments in the country.

 

Increase in external debts   

According to SBP report, country’s total external debts have reached $45.926 billion till end of March 2008 as compared to $42.931 billion in the same period of year 2007. Total foreign debt grew to $44.596 billion while total foreign exchange liabilities slightly went down to $1.33 billion which was recorded $1.342 billion on March 31, 2007.

Public and publicly guaranteed debt rose to $40.692 billion against $37.836 billion in the corresponding period of last year. Public debt increased to $40.479 billion including medium and long term debt for more than one year surged to $39.865 billion in which Paris Club grew to $14.527 billion which was witnessed at $13.430 billion on March 31, 2007. The increasing external debt has further narrowed recent regime options to subsidise even the basic necessities of life.

 

Declining foreign exchange reserves

According to the official statistics the foreign exchange reserves of the country fell by $44 million to $10.909 billion in last week. The foreign reserves held by the State Bank stood at $8.267 billion while those with other banks stood at $2.642 billion. An extraordinarily large trade deficit, which created a huge current account deficit, has also weakened the rupee from Rs60 against a dollar at the beginning of the current year to around Rs70. The widening parity between the Pak rupee and dollar has further created multidimensional macro-economic problems for the government.

 

Decreasing share in world trade     

According to the World Bank (WB) recent report (2008), due to many diversified but integrated reasons, the country’s share in world trade has further dropped by 9.5 per cent in the last fiscal year. The other regional economies like China and India recorded an increase of 11.3 per cent and 9.3 per cent respectively. WB report, Pakistan also has a low trade integration ratio of 41.9 per cent (trade as percentage of GDP) when compared with India’s 45.2 per cent and Bangladesh’s 47.5 per cent. The real trade growth in Pakistan was 0.9 per cent while in China, it was 21.7 per cent.

 

Phenomenal increase in government’s borrowing

Right from the its beginning, the recent regime relied heavily (13.29 per cent) on the banking sector for borrowing the money.  Latest statistics of the SBP showed that from July 1, 2007 to June 28, 2008 money supply increased to Rs540.094 billion with a growth of 13.29 per cent. Compared to this, money supply was recorded at Rs658.250 billion with a growth of 19.32 per cent during July 1, 2006 to June 30, 2007, when total currency in circulation was Rs4.065 trillion. Government borrowed Rs633.173 billion from the central bank in order to meet its budgetary expenditures. Government should op other means to generate revenues to meet its budgetary deficits.

 

All-time high inflation

According to the Federal Bureau of Statistics (FBS) report (July 2008), inflation was at 12 per cent during the outgoing fiscal year (2007-08) from 7.7 per cent in the previous year due to high food and energy prices. The increasing disparity between the demand-supply chains, seven-time increases in oil prices over the past few months and high energy costs have pushed prices of essential food items to an unprecedented level, eroding the purchasing power of lower income groups in the country.

The government had projected the annual inflation target for 2007-08 at 6.5 per cent, but raised it to 12 per cent for 2008-09. Consumer Price Index (CPI) rose by 21.53 per cent last month, the highest increase in a single month. Food inflation increased to a record 32 per cent, the highest not only in the country but also in the region i.e. 28 per cent in May 2008.

 

Concluding remarks

Socio-economic tsunami is on the rise. It is high time for systematic fiscal management, export-oriented policies, regional trade, agriculture productivity, accountability, transparency and above all true and functional political will.  It is time to broaden our tax base. Simplicity, service and sacrifice should be the main mantra of the government and people.

 

 Expected losses (Rs in million)

 

 Industrial locality     Closure (%)    Production     Revenue        Exports

 

 Korangi industrial estate     40-45  900     102     90

 Site industrial estate          30-35  500     5        50

 Fed-B area industrial estate 20-25  250     3        25

Source: The News 28/7/2008

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