EDITORIAL: The decision of the government communicated through an unscheduled press conference by Finance Minister Miftah Ismail to withdraw subsidies extended by the former Prime Minister Imran Khan on 28 February 2022 has to be appreciated on two counts.
First, the subsidy was becoming ever more economically unsustainable as the international prices of oil and products continued to rise, a trend that continues to this day, due to the much longer than initially anticipated Russia-Ukraine war.
This no doubt accounts for the statement by Ahsan Iqbal, the federal minister for Planning, Development and Reforms, that the government has been unable to disburse a single rupee for Public Sector Development Programme (PSDP) in the last quarter of the current fiscal year.
And secondly, the anticipated severely negative political fallout on whichever administration that announced the withdrawal of the package was not projected to be short-lived, defined as less than six to eight months, though by the middle of next fiscal year (starting 1 July 2022) a lower budget deficit is likely to dampen inflation; and, if the international prices of oil and products begin to decline, the government would have greater flexibility in setting prices, though; that flexibility will be subject to its pledge to the International Monetary Fund (IMF) under the seventh review, yet to be completed, on how much petroleum levy and sales tax on these products is budgeted for 2022-23.
In this context, it is relevant to note that for the current fiscal year petroleum levy was budgeted at 610 billion rupees though it was not realised with the previous government adjusting it downward to zero as the international prices rose.
It is relevant to note that subsidies have not totally been withdrawn as the government has opted to raise prices by 30 rupees per litre, a shortfall that may rise in the event that the prices of petroleum and products rise and may contract or disappear in the event that they come to the pre-Russia-Ukraine war levels.
While the obvious solution for heavy reliance on a tax on oil and products would be to widen the tax net and ensure that all sources of income are taxed as opposed to relying on tax on services and products, which are regressive in nature and whose incidence is greater on the poor than on the rich, yet a more potently viable solution would be to target subsidies.
Petroleum Levy (PL) and sales tax on oil and products are levied on all irrespective of income and needless to add there was serious debate within the Khan administration to target subsidies to those who needed them as there is within the incumbent government.
And the solution is in linking the subsidy to Benazir Income Support Programme beneficiaries and to motorbike owners with income less than a certain threshold. Today the concept of targeted subsidies is viable mainly because of the national identity card computerisation that provides access to detailed data of all nationals to the government.
The incumbent government, one and a half months after taking oath, has finally taken the economically critical but politically challenging bitter pill to raise the price of oil and products. True, that the delay contributed to the cessation of disbursements to PSDP projects and to the budget deficit, a highly inflationary policy, however one would hope that the upcoming budget would focus on containment of the budget deficit so that there is less pressure on further tightening the monetary policy and the eroding external value of the rupee than at present.
Copyright Business Recorder, 2022