EDITORIAL: Prime Minister Shehbaz Sharif, while addressing the distribution ceremony of the Prime Minister’s Youth Business and Agricultural Loan Scheme, claimed that the decision to reduce the domestic price of imported petrol and high speed diesel effective for the fortnight starting 16 July - the two items that account for the bulk of revenue collection from imposts on oil products including the petroleum levy - was possible as the rupee strengthened against the dollar subsequent to the International Monetary Fund’s (IMF) disbursal of the first tranche of $1.2 billion of the $3 billion nine-month Stand-By Arrangement (SBA) for Pakistan.
At the same time, the government through the annual rebasing exercise, fully supported by the IMF, upped the base electricity price by 4.96 rupees per unit, a sizeable increase effective from 1 July onwards. The rise in gas prices to meet the economically viable objective of full cost recovery is also on the cards as an SBA condition.
The general public consensus is that the government gave with one hand and took away with the other. A look at the weightage of these items in the calculation of the consumer price index reveals the following: electricity weightage 4.5, gas weightage 1.08 and motor fuel 2.9. In other words, the government clearly took away more than the relief it gave to the public at large.
The government retained 50 rupee per litre Petroleum Levy (PL) on petrol and HSD though the max limit has been increased to 60 rupees per litre in the Finance Bill 2024.
The benefit of reduction in petrol and HSD prices would be availed largely by motorbike and car owners, or lower middle income to the rich, and not the vulnerable as public transport fares and freight charges have invariably exhibited a resistance to a decrease in price trend in the event that fuel prices decline.
Therefore, the transport costs of perishables and non-perishables across the country are unlikely to decline, thereby further limiting the impact on general inflation.
Two further observations on the Prime Minister’s claim are critical. First, the Prime Minister did not dwell on government’s violation of previously agreed policy measures with the IMF, agreed not only during the tenure of the previous administration but also those agreed with the incumbent government in August 2022 – notably that exchange rate flexibility be used to address balance of payment problems rather than administrative and exchange measures.
And secondly, the revenue and expenditure measures identified in the 9 June 2023 budget were neither in line with the IMF conditions agreed previously nor exhibited sound economic policies.
The revised 23 June budget was approved by the Fund that led to the staff level agreement on the SBA. Failure to implement these two agreed economically viable policies while insisting that Pakistan would not default even without an IMF loan was the main reason for the failure of the government to reach the ninth review staff-level agreement scheduled for early November 2022 under the now suspended Extended Fund Facility programme – a delay that caused dollar bonds to trade at 36 cents to the dollar, lack of foreign exchange reserves to meet our import requirements including fuel, and last but not least, a decline in remittance inflows of around 4 billion dollars in comparison to the year before.
Economic theory dictates that a reduction in price leads to an increase in consumption which would raise the total tax collections under that head. It is relevant to note that the consumption of petrol and HSD plummeted by 21 percent during the first nine months of 2022-23 due to high inflation, around 29.4 percent last month, rising unemployment as large-scale manufacturing index declined throughout the year, and 0.3 percent growth rate, leading to much lower collections than budgeted under PL.
With economic growth continuing to stagnate with implications on inflation and unemployment, the budgeted PL of 875 billion rupees for the current year appears to be a gross over-estimate unless the government increases the PL rate to its new maximum.
Failure to reach the budgeted PL would imply either a mini-budget in months to come or as has been the norm, higher borrowings from the commercial banking sector that would raise the mark-up for the year which, in turn, would raise the budget deficit, a highly inflationary policy.
The current team of economic managers has shown an inability to take a holistic approach and one can only hope that their successors are more competent, academically and with respect to the country’s economic dynamics, to deal with the appalling legacy they would have to deal with.
Copyright Business Recorder, 2023
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