EDITORIAL: Fuel prices have been raised for the third time, effective 16 June, in exactly three weeks — this time by 24.03 per litre petrol and 59.17 per litre high speed diesel (HSD); on 27 May and then again on 3 June petrol and HSD prices were raised by 30 rupees per litre each time.

Few economists would challenge the need to raise the prices of petroleum and products, given the significant rise in the international prices of oil: Brent (crude) was traded at 87.77 dollars per barrel in January 2022 against 74.10 dollars in December 2021.

By February 2022 prices had jumped to 97.13 dollars per barrel which prompted the then Prime Minister, Imran Khan, to announce a 10-rupee per litre reduction with the reduced rate to be applicable till end June 2022 — a populist measure designed because of the threat of a no-confidence motion facing his government, in utter disregard of the consequence of this decision on the country’s finances by the substantial rise in “unfunded” economically unfeasible subsidies.

By March Brent was being sold at 117.25 dollars per barrel, with a decline in its price in April to 104.55 dollars; however, prices rose again in May to 113.34 dollars and this month prices have risen to as high as 126.7 dollars per barrel. The difference between the subsidies projected in the relief package announced by Imran Khan were, therefore, grossly understated in subsequent months and ignored was the fact that Pakistan’s economy did not have the fiscal space to fund these subsidies — a situation exacerbated by 610 billion rupees budgeted for petroleum levy in 2021-22, an amount which was not realised.

The rupee’s erosion is ongoing at a brisk pace, with reserves dwindling to 8.9 billion dollars. This accounts for the rising rupee cost of imported petroleum and products and consequently contributes to the rise in the cost per litre for domestic consumers. Within a macroeconomic context, it needs reminding that each rupee loss vis-a-vis a dollar adds a 100 billion rupees to the budgeted markup payments and given that the budget 2022-23 took 183 as the rupee-dollar parity, which is over 20 rupees lower than the current interbank rate, the budget itself is out of synch even before it has been approved by parliament.

Three observations are in order. First, the Shehbaz Sharif-led government took oath on 19 April and instead of spacing out the fuel price rise over 9 weeks there was an inexplicable delay leading to, unadvisedly, concentrating the rise to just three weeks that accounts for severe public discontent with obvious political ramifications. Second, the Khan administration was dismissed in the early hours of 10 April (soon after midnight) and hence the “unfunded” subsidies effective 1 March 2022 should have been effective latest till 19 April when the cabinet was sworn in; however, the subsidies were allowed to continue and the budget for 2022-23 indicates that petroleum price differential cost the exchequer a whopping 250 billion rupees.

And third, and even more disturbingly, the budget 2022-23 envisages 750 billion rupees from petroleum levy — a target that presupposes a rise in consumption in spite of a massive rise in prices, and a decline in the international prices of oil to a level that would enable the government to not only begin levying the petroleum levy again (which would raise input costs making our products uncompetitive internationally) but to reach the maximum allowed limit of 30 rupees per litre. These are serious flaws in the incumbent government handling of a crisis situation that it simply cannot lay at the doorstep of the Khan administration or to the deal made with the International Monetary Fund (IMF).

Sadly, it is fairly evident that the government’s justification and the Pakistan Tehreek-e-Insaf (PTI) government’s indictment for raising rates is only partly economic but mainly political point-scoring.

In a recent statement, Prime Minister Shehbaz Sharif argued that the rise in fuel prices is due to the IMF deal; however, he and his team members need to acknowledge that the Fund’s advice is sound as, leave alone not having the fiscal space to fund subsidies, this government has presented a budget that is dependent on foreign borrowing to the tune of 36 to 37 billion dollars with 21 billion dollars earmarked for interest/repayment of past loans as and when due, 4 to 5 billion dollars to strengthen the foreign exchange reserves, and the rest for budget support.

Clearly, more austerity measures were required and higher revenue targeted by the Federal Board of Revenue (FBR) than was envisaged in the budget. This scapegoating of the IMF for our economic ills must stop because it is the proclivity of successive governments to continue to spend beyond their means is in fact the root cause of our present predicament and the dire straits that our economy is in.

Copyright Business Recorder, 2022

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