In a move likely to be heavily criticised all over the country, the government increased the prices of domestic oil products by up to 13 percent with effect from 1st April, 2011. The increase was stated to be in line with the trend in global prices and meant to reduce the level of subsidy on oil products.
The price of high speed diesel (HSD) was increased by Rs 10.67 per litre or 13 percent, petrol by Rs 6.98 per litre or 9.1 percent, HOBC by Rs 7.16 per litre or 7.9 percent, and kerosene oil and light diesel oil each by 13 percent or Rs 9.65 per litre and Rs 9.07 per litre respectively. With this new increase, the prices of petroleum products will now stand at; HSD Rs 92.89 per litre, kerosene oil Rs 84.10 per litre, LDO Rs 78.98 per litre and petrol Rs 83.56 per litre. It was estimated that the government had provided Rs 35 billion as subsidy on petroleum products during the last five months, and the government has also to absorb a loss of Rs 10 billion during April, 2011 despite the present increase in oil prices.
Sources have also indicated that the Prime Minister was somewhat reluctant this time to increase the prices of POL products so sharply but the finance team insisted on the move to maintain cordial relations with the international lenders. However, he is reported to have directed the Finance Minister to consider measures to provide relief to relatively poor consumers like for those owning motorcycles and rickshaws. It was also revealed that the Prime Minister had tried to take MQM on board before announcing the decision but could not succeed in persuading his coalition partner.
The latest surge in domestic oil prices announced by the government is the biggest since July, 2008 and would of course have serious consequences for the economy and the life of ordinary people of the country. As is usually the case in the oil importing countries, the increase in oil prices of such a high magnitude would certainly slow down industrial activity and retard the economy's growth prospects, leading to further unemployment and poverty in the country. Prices of all commodities and services in the domestic market will also increase in almost direct proportion to the rise in the prices of POL products.
All these negative developments are bound to increase the deprivation of common man and likely to be very painful, especially at a time when the growth rate is already stagnant, unemployment and poverty is rampant and inflation is in double-digit. The news of such a sharp increase in oil prices would undoubtedly be like a bombshell on the people and fiercely opposed by almost all the political parties, except the PPP, to get political mileage.
However, while the government must be aware of the political cost of such an unpalatable decision, it had to face the reality that inaction on its part would increase the budget deficit to unsustainable levels and force it to borrow heavily from the State Bank, leading to further accentuation of price pressures, depreciation of the rupee and possibly a rupture of relationship with the IMF and other multilateral financial institutions. The government could have opted for a lower increase in oil prices if there was some fiscal space available but, unfortunately, developments during the current year have been highly unfavourable on this front. In fact, the latest news is that the FBR has revised tax collection target downwards from Rs 1,667 billion to Rs 1,604 billion during FY11 and, given the flow of receipts during the first eight months of the year, even this new target would be hard to achieve. Additional measures envisaging tax receipts of Rs 53 billion announced recently are also not likely to yield the desired results due to stiff resistance by the affected groups. Checking corruption and imposing taxes on agriculture sector etc, is the right way to go but these are only medium and long-term measures.
External sources of finance are also drying up gradually. On the other hand, expenditures are mounting due to extremely volatile security situation and increasing debt servicing. The problem of circular debt and increasing losses in PSEs is still unresolved. In such a situation, the provision of higher level of subsidy on oil products and consequent higher fiscal deficit could have only resulted in greater macroeconomic instability. The government, in fact, had hardly any choice in the matter and has done what was probably unavoidable as a short-term measure at this juncture.
This does not, however, absolve the government from broadening and widening the tax net, introducing a progressive tax regime, stopping leakages and corruption etc, to raise more funds and curtail current expenditures to the minimum. This, in our view, is urgently required to create adequate fiscal space to meet unforeseen exigencies like a sudden increase in international oil or food prices. In the meantime, let us hope and pray that the crisis in the oil exporting countries is over soon and the prices in the international oil market revert to their previous low levels so that the government does not have to make such hard choices in future.