EDITORIAL: Oil and Gas Regulatory Authority (Ogra) recommended a per litre price rise of 11.50 rupees for petrol while the Prime Minister allowed only 5.40 per litre. The notified rise, significant as it is, is being justified by the government team with the exact same thrust as that employed by previous administrations notably that Ogra had recommended a much steeper raise that was rejected by the Prime Minister. This logic undermines the basis for Ogra recommendation which is premised on: (i) fluctuation in the international prices of oil necessitating a revision; however, ignored is the impact of the rupee erosion that has been ongoing since the start of the new fiscal year on 1 July 2021 – an erosion that is sourced to the State Bank of Pakistan (SBP) which has been tasked to intervene in the market only during disorderly market conditions as per the agreement with the International Monetary Fund (IMF); however, independent economists have challenged the ongoing erosion on the grounds that at present the foreign exchange reserves are over 18 billion dollars with a historic high of over 29 billion dollars remittance inflows; and (ii) tax rate on these products cannot be manipulated by Ogra and therefore its recommendation takes into account the tax applicable at that time as given; in this context, it is relevant to note that the government has budgeted a high of 610 billion rupees from petroleum levy this year apart from the levy of sales tax. Manipulation of tax is also where the government’s capacity to adjust the Ogra recommended rate lies. It must also be borne in mind that tax on petroleum and products is an indirect tax whose incidence on the poor is much higher than on the rich.
Thus the onus for a recommended rise in the price of petroleum and products does not rest with Ogra but with the government which cannot only intervene in the foreign exchange market but also adjust the applicable taxes on petroleum and products which, in turn, would reduce the government’s projected revenue stream, necessitating a downward adjustment of expenditure and/or an upward revision of other taxes if the overarching objective is to contain the budget deficit which is a highly inflationary policy. In other words, raising the prices of petroleum and products is inflationary whose effects are immediate while a rise in the budget deficit is also inflationary though its effects are not that immediate.
The government is thus in a catch 22 situation: any raise in the prices of petroleum and products would have a cascading impact on all products through rising transport costs as well as utility costs while the budget deficit has been unsustainable for the past three years – well over 7 percent on average and is budgeted at a low of 6.3 percent this year, considered an extremely ambitious target.
An out of the box long-term solution for Pakistan would be to reform the tax structure and to begin by lowering lower the existing heavy reliance on petroleum and products as a revenue source, considered the lowest hanging fruit, which is not collected by the Federal Board of Revenue. The Khan administration is one month away from completing its third year in power and surely it is time to implement tax reforms with a view to ensuring that they are fair, equitable and non-anomalous.
Copyright Business Recorder, 2021