The federal government on Friday took a populist but an economically unviable decision of procuring 7.7 million metric tons of wheat from farmers at Rs1,050 per 40 kilogrammes. This will ensure an injection of Rs210 billion into the economy but it will also cause a surge in price inflation.
The decision was taken in a meeting of the Economic Coordination Committee (ECC) of the cabinet, headed by Finance Minister Dr Abdul Hafeez Shaikh. The procurements will be made by borrowing money from banks at exorbitant interest rates and the federal government will provide sovereign guarantees to the banks.
The ECC also decided on adjusting petroleum prices on a fortnightly basis, against the current practice of a monthly determination, despite strong opposition by the finance ministry and the Oil and Gas Regulatory Authority (Ogra). “Some of the cabinet members warned the ECC chairman that fortnightly adjustments would encourage hoarding, resulting in a shortage of petroleum products in the country, leading to public riots,” an official said after the meeting.
The provinces protested against Prime Minister Yousaf Raza Gilani’s decision to increase wheat prices from Rs950 to Rs1,050, an increase of 10.5% without consulting them, an official said. According to the findings of the finance ministry a 10.5% increase in wheat prices would result in a 3% hike in inflation.
The government took the decision to acquire 7.7 million metric tons of wheat despite having 4.5 million metric tons in stocks. This may create storage problems and also increase the federal government’s incidental charges, the official added. For the current year, the estimated production is 25 million metric tons. According to the decision, an amount of Rs209.6 billion will be borrowed from banks. Usually, they charge the Karachi Interbank Offered Rate (currently at around 12%) plus up to 3% in interest, making it one of the expensive borrowings.
Till the end March, the federal government and the provinces owed Rs179.6 billion to banks on wheat purchase borrowings. The fresh lending will increase the volume to Rs398 billion. Punjab will procure 4 million metric tons of wheat at Rs105.3 billion, Sindh will acquire 1.3 million metric tons at Rs34.2 billion, Khyber-Pakthunkhwa will purchase 325,000 metric tons worth Rs8.6 billion, Balochistan will purchase 100,000 metric tons worth Rs2.6 billion and the federal government will procure 2 million metric tons costing it Rs59 billion.
In what appeared to be a controversial move, the government overruled a previous decision of the ECC and extended a seven and a half year tax holiday to the Byco Oil Refinery Company.
The extension was granted despite the fact that the company failed to meet the basic condition set by the commission in March 2009. The then chairman of ECC Shaukat Tarin had granted the tax holiday on the condition that the refinery would be operational by the end of 2011.
The petroleum ministry argued that the refinery could not be commissioned on time due to the absence of capital and cost overruns, seeking another year’s extension which the ECC approved. The tax holiday will become effective from the date of its commissioning.
The ECC also decided to exempt taxes and duties on materials to be imported or locally produced for the construction of the Iran-Pakistan gas pipeline, liquefied natural gas projects and other such ventures.
Published in The Express Tribune, April 7th, 2012.