Hike in POL products' prices

As the clock was ticking towards midnight on the last day of February, 2011, the government of Pakistan was finally forced to announce a substantial increase in domestic oil prices, signalling an end of a four-month freeze, forced on it by the opposition of the major political parties.
The decision was made in an apparent bid to pass on the partial impact of the consistently rising trend in international prices and contain the fiscal deficit within tolerable limits. According to an official announcement, prices of all oil products were raised by a uniform rate of 9.9 percent.
Price of motor spirit or petrol was jacked up by Rs 7.23 to Rs 80.19 per litre, HOBC by Rs 8.58 to Rs 95.29 per litre, kerosene by Rs 7.00 to 77.95 per litre, LDO by Rs 6.60 to Rs 73.21 per litre and HSD by Rs 7.76 to Rs 86.09 per litre. Justifying the increase, Ogra spokesman, Jawaid Naseem, who announced the price revision, stated that international prices of kerosene and High Speed Diesel had risen by 25.8 percent and 24.8 percent respectively while those of petrol and furnace oil had gone up by 27.3 percent and 23.4 percent respectively since November 01 last year.
The government had also increased its share of revenue through the petroleum levy. Besides 17 percent GST, the government will now charge Rs 6.25 per litre on petrol, Rs 9.80 on HOBC, Rs 3.75 on HSD and 25 paisas per litre on kerosene. It was also asserted that distributor and dealer margins for MS, HOBC, kerosene and LDO had been fixed according to the ECC decision and no change had been made in their margins despite their protests.
The surge in domestic oil prices, announced by the government, was the biggest since July, 2008 and would of course have serious consequences for the economy. As is usually the case with other oil importing countries, including those which are highly developed, the increase in oil prices of such a high magnitude would further slow down industrial and business activity in Pakistan and retard its growth prospects, leading to higher levels of unemployment and poverty in the country.
Along with this indirect impact, the prices of most of the commodities and services would also increase in almost direct proportion to the rise in the prices of POL products in the domestic market. It is not hard to imagine the fallout of about 10 percent jump in oil prices in a country, where the growth rate is already stagnant, poverty and unemployment is touching almost intolerable limits and inflationary pressures are accentuating.
It is also sad to note that political turmoil in the oil producing countries of the Middle East and North Africa that has caused recent instability in oil prices, is not likely to settle down soon. Any further increase in international oil prices, which appears to be almost inevitable at the moment, would again force the government to raise the domestic oil prices, leading to further aggravation of the overall socio-economic situation in the country.
While it would be tempting to criticise the government for announcing a hefty increase in domestic oil prices, the real problem, in our view, could largely be attributed to a highly mismanaged fiscal regime. It could be very well argued that if there was some fiscal space available, the domestic oil prices could be kept relatively stable by providing enough subsidy from the budget.
Unfortunately, the budgetary position of the government is already so precarious that the consolidated fiscal deficit for July-December, 2010 has reached 2.9 percent of the GDP and the government was forced to borrow Rs 443 billion from domestic sources during this period. The deterioration is really disturbing when seen against the full year's targets, which stipulated a deficit of 4.7 percent of GDP and only Rs 166 billion to be mobilised from domestic sources for the budget.
The Federal Board of Revenue is also very hard pressed to meet even the downward revised tax target of Rs 1,604 billion during the current fiscal year. During March-June, 2011, it has to collect Rs 739 billion to meet this target, which appears to be an impossible task. The government had absorbed a loss of Rs 13 billion on account of petroleum levy from October 2010 till February, 2011 and was expected to lose another Rs 5 billion during March, 2011, even after the increase of 9.9 percent in oil prices.
All of this underscores the need to vastly improve the fiscal position of the country in order to meet unforeseen eventualities but the obstacles to consolidating the budget in a satisfactory manner are obvious and need not be recounted here. Suffice it to say, that the previous policy of freezing the domestic oil prices was also untenable.
A higher subsidy, financed by the printing of currency notes in billions of rupees would have been highly inflationary, causing more misery to the ordinary people who were the least able to afford it. Of course, all the major political parties in the opposition would also pounce upon the government for making a decision, which is bound to be inflationary and anti-poor.
They would, instead, ask the government to widen the tax net, introduce a progressive tax regime, stop leakages and corruption etc to raise more funds and curtail current expenditures, without realising that, though necessary, these are long-term measures and could only be taken if the majority of the parties are prepared to cooperate.
As a short-term measure, what the government has done appears to be largely appropriate to the situation and probably unavoidable. In the meantime, let us hope and pray that the crisis in the oil exporting countries is over soon, oil prices in the international market revert to the previous low levels and our government is able to improve its fiscal position to a degree that could allow it to finance unexpected expenditures in an extraordinary situation. The headlines, like 'the government has thrown a petrol bomb at the masses,' without saying that the step was necessitated by exogenous factors, would only complicate matters.