The latest hike in fuel prices raised the inevitable storm exposing yet again the lack of realism among our politicians and bureaucrats. Politicians opted for popularity by denying the market reality, and ignoring the economic impact of a shutter-down strike, they called one for which bureaucrats afforded them the reason - an inept oil price rise.
Ogra ignored the fact that Brent crude price isn't relevant for setting prices in Pakistan because we buy Persian Gulf crude whose price usually stays below that of Brent crude. Linking prices in Pakistan to the price of Brent crude amounts to using a deceptive basis for jacking-up domestic petroleum prices to cut subsidies.
Besides, to justify its 9.9 percent hike in oil prices, Ogra quoted the rise in global prices of 'refined' products conveniently forgetting that nearly two-thirds of the petroleum products consumed in Pakistan are refined locally (at costs far below their international level). Using this basis for the price hike was pure expediency.
Only, a third of the price hike should have been based on the rise in global prices of refined products and the rest on prices based on the low refining costs in Pakistan, and since fuel prices form a part of the cost of every good, and spur inflation, cutting subsidies on petroleum products shouldn't have been used to pay for the bulk of the oil price rise.
Instead, the bulk of it should have been funded by an increase in taxes that don't or (only indirectly) impact the low-income segments, ie nearly 80 percent of Pakistanis. The fact that soon after announcing the flawed rise in petroleum prices the government agreed to cut it by half shows how reality-insensitive are the policy-makers.
In spite of Saudi assurances, the Persian Gulf crude price may rise, and by the end of the current financial year Pakistan's oil imports may touch $13 billion against $10.5 billion in 2009-10. But if exports touch $22 billion and inward remittances continue at their current pace, critically important subsidies won't need cutting if we discourage non-essential imports.
These imports include TVs, kitchen gadgetry, cars, mobile phones, cameras, shoes, and other luxury items. Lower imports of these items could save foreign exchange for importing oil to keep the industry (especially its import-substitution sectors) alive, and help it to expand rather than collapse heralding total social chaos.
An option not focused on is that, with the "highest-ever" exchange reserves (sole consolation for the regime) and imports tapering off, except for oil primarily due to a rise in global prices, should Pakistan beg for the remaining two tranches of the IMF's Stand-by Arrangement by compromising its sovereignty in taxation measures?
We all (except the regime) know that Pakistan faces the largest-ever fiscal deficit. Yet the regime can't see that this hole, plugging, which could allow continuing critical subsidies to check inflation, was caused by tax evasion (eg in Afghan Transit Trade), but far more by resource waste that the regime ignored, despite loud warnings.
That Pakistan's taxation system is a mess is common knowledge; reforming it calls for very realistic and practicable steps in view of the whole variety of institutional deficiencies that allow tax evasion and the fact that ordinary businesses remain financially illiterate and get no help in proper book-keeping or in paying taxes.
Until these distortions are remedied, adopting austerity, cutting revenue waste and corruption but, above all, retrieving the stolen national wealth, are the remedies, but the regime coolly ignores them. Seeing this track record, won't taxpayers evade taxes to face up to the escalating economic turmoil on their own because the state appears to squander the tax revenue?
The writ of the state is depicted by the 'demand' that, if smuggling is to drop significantly, import duties be cut by 10 percent. Implying if that's not done, smuggling would go on. But this threat, besides being a shocker, is real. The Tax Ombudsman has already exposed pervasive corruption in the Custom department. In this milieu, the Ministry of Finance proposes to impose 15 percent Income Tax Surcharge and 1.5 percent Special Excise Duty. But, to partially regain the mandate it has squandered away, the parliament won't approve these taxes, and a visibly worried President too has declined to impose these taxes through an ordinance.
By implication, to plug the fiscal gap the 'stolen' national wealth must be retrieved, but the regime resists all efforts to do so; frequent replacement of attorney generals, and the heads of NAB and the FIA proves it. Whenever conscientious officers were appointed to head these offices the regime promptly removed them. The Supreme Court keeps regretting that its efforts (latest for removal of the FIA chief) to retrieve stolen national wealth and punish the culprits are defied, but these regrets are ignored by the regime, which amounts to contempt of court and deserves to be punished. But, visibly, the judiciary still reposes hopes in the regime.
The most worrying aspect is that rebuilding and expansion of physical and social infrastructure is being sidelined; we are paying its price - killing shortages of energy, power, and water, to mention a few - and will pay a steeper price in the coming month and years via crippling of economic activity and its social fallout.
In its Development Finance Review for the quarter ending December 2010 the SBP regretted the stagnation of banks' development finance portfolios courtesy reduced credit flow to the private sector because of mounting state debt to sustain the uncared for fiscal deficit. On a quarter-on-quarter basis only the agriculture sector grew by 3.3 percent; the rest recorded declines.
This scenario makes you wonder how the regime can keep the state intact because the state is not performing most of its duties due to resource constraints. State performance even in paying salaries to its employees via bank borrowing has reached its limits. How long will the state remain solvent, given this performance? The choice now is between retaining an incompetent regime to protect democracy, or the collapse of the state. Should the state be sacrificed at the altar of flawed democracy? That's what we must ask ourselves.