Business

Counting the cost: Rs5b monthly burden on public purse

Decision to reverse petrol price hike sends wrong signal to international donors, places additional Rs5b burden.

Shahbaz Rana January 07, 2011

ISLAMABAD: The government’s decision of reversing the increase in petroleum prices to cool political temperatures has not only sent a wrong signal to international donors, but will also put an additional burden of Rs5 billion a month on the public purse in the wake of widening gap between income and spending.

Independent experts say the government has portrayed itself to be a “lame duck” giving a negative signal to donors that it cannot stand by its own decisions. Experts term the decision the “death of the economic reforms agenda”.

“The message international donors have received is that if the government cannot absorb the pressure on petrol prices then how can it take up major economic reforms,” said Dr Ashfaque Hasan Khan, Dean of Business School of NUST. He said the decision will not help control inflation, as the benefit of reversing prices will be lost by borrowing money from the State Bank of Pakistan to give subsidies and cover revenue loss.

The government borrowed Rs327 billion from the central bank in six months to finance the budget deficit – a gap between income and spending. The provisional figures show that the budget deficit from July through December soared to 2.9 per cent of the total size of the economy or Rs496 billion. The central bank has labelled the government borrowing inflationary.

The reversal of decision comes at a time when the International Monetary Fund has extended the suspended $11.3 billion bailout programme for nine months till September 2011. The fund is currently discussing with Islamabad to send its team for negotiating parameters for a fifth review of the economy and release of $1.7 billion sixth loan tranche. The IMF team is likely to reach Islamabad in the last week of January. Under the IMF programme, Pakistan abolished the oil subsidy regime in 2009.

“The government is in minority and it is a political decision, not an economic one,” said Dr Hafiz Pasha, the former finance minister.

The Parliamentary Committee will devise a strategy to pass on the increase to the end consumers within a week. An official of the Oil and Gas Regulatory Authority said the oil prices are like to surge further in the international market due to a rise in demand in China, Europe and America. He said the current trend cannot be solely termed “seasonal spike”, as China has started generating power by using diesel.

The decision may also delay the due 4.3 per cent increase in electricity prices. The government had earlier decided to increase electricity prices by 2 per cent a month aimed at gradually phasing out subsidy. It had enforced a 4 per cent increase in tariff while the third and fourth phase of these staggered spikes are overdue. Officials have estimated Rs224 billion annual subsidy, provided the government fails to phase out subsidy and take crucial decisions relating to the power sector. All this will lead to a soaring gap between the income and spending and a consequent borrowing to bridge it, which is inflationary.

Published in The Express Tribune, January 7^th, 2011.

COMMENTS (11)

abdullah | 13 years ago | Reply this is a bad decision govt is not thinking in the interest of country rather they r thinking about what the man sitting in london says....v should increase the price ,internationaly the prices have gone up ......and should cut extra expenses and ministries

Syed Nadir El Edroos | 13 years ago | Reply Who exactly is going to invest in the State Bank of Pakistan's TFC's and Sukuks? Can you imagine the rate of return we would have to offer to secure investors? Who is going to pay that back? All they will do is print more money which cause more inflation! As for petrol prices. Today oil is at $91 per barrel. What happens when oil reaches $100 or $110? Will oil prices stay the same? As for the Rs. 5 billion, thats Rs. 5 billion per month. Thats hardly a petty amount as we spend much less on that on education each year. Subsidising consumption is poor solution. The same amount should have been invested in reducing inefficiencies. Has anyone stopped to question why our motorcycles or cars have the same efficiency of auto mobiles from 20 years ago? What off all those 40 year old Bedford trucks that populate our roads? Can you imagine what mileage they offer? How about encouraging better insulation and architectural design to reduce energy waste while heating or cooling homes to reduce power demand, thus helping to reduce demand for oil imports for thermal power stations? At the end of the day it comes down to the state heavily taxing petroleum sales to raise revenue, because in a land of patriotic Pakistanis only 1.9 million people file tax returns. One could argue that if people paid their direct taxes - then the state should withdraw indirect taxes off petroleum products in return. The rich import/buy the expensive cars, after dodging most of their tax obligations and then are also the heaviest consumers of petroleum products. Those are the people who will have the biggest smiles at the end of the day.

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Imran Ahmed | 13 years ago | Reply I totally agree with Mr. Aamir. TFCs & Sukuks might be a good alternative and govt dependence on T Bills & PIBs can be reduced.

Rana Taimoor | 13 years ago | Reply Subsidy????? my foot ///// a pure bs by finance gurus. Petrol and other products costs govt around Rs. 40 a litre, It will certainly reduce the revenue of the govt but that can easily be adjuted by reducing their own (govt's) expenses. No need to have an impotent army of cabinet ministers good for nothing. Why not thery reduce the size of their cabinet members. Why not govt is not willing to reduce the number of parlimentarioans. We do not need 300+ parlimentarians doing no legislation and burping out on my taxed income.

Aamir | 13 years ago | Reply I disagree with Mr.Nadir. The increase in petroleum prices has a multiplier effect on inflation which is already too high. The only way to reduce inflation, known in Pakistan, is to raise interest rates which is totally destructive for the economic activity. One thing must be kept in mind while commenting on this decision that it will add to budget deficit which is difference between government's income and expenses. Govt may utilize other sources of income/taxation and the other option is to reduce expenses one bit. The income it would have brought to the Govt was only Rs.5 billion. Now its hard to understand that this petty amount of Rs.5 billion either by other taxation measures or reduction in current expenses of the govt (which is the need of the time). The Govt needs to take a holistic view in this regard (which i hope they would have before reversing the prices). I think this is high time that govt should start to look for indigenous sources of funding for development expenditures. The Govt should introduce TFCs/Sukuks based on the premises of project financing instead of looking at borrowing from IFIs and SBP. This is an easy and cheaper source of funding for any provincial or federal government. The Pakistani financial markets do have investors, including general public, for such govt backed instruments. This would liberate the economic managers in devising their policies and being more flexible. This would help the Govt to set this nation free of spiralling inflation, specially on consumer items.

adnan | 13 years ago | Reply its not a wise decision.now will goverenment will increse its borrowing from state bank which will result in inflation.the magnitude of inflation due to borrowing from state bank is more as compared to hike in petrol prices. i do not appreciate this decision.it may yield some political score butit will hurt economy.

J.Oberoi | 13 years ago | Reply No RGST, no petroleum price hike, where is the money going to come from? IMF is not going to release the next tranche. This is a dangerous game being played to stay in power. If the economy collapses, all hell will break loose.

Omar | 13 years ago | Reply Five billion can easily be recovered by reducing military expenditures and cutting down the number of redundant government ministries. Seriously, does anyone benefit from spending millions of tax payers on such frivolous agencies such as Ministry of Tourism, Sports, OP, etc. Cut out all the fat from govt and then you can continue to have a fuel subsidy which benefits the average man.

Shams Ajani | 13 years ago | Reply This is a very bad decision.It will economically further cripple the country. The present set up should be shown the door. First it was No RGST Then reversal of this decision We have 80 plus ministers in Federal Government inspite of 18th Amendment that has develoved a lot of functions to provinces In a country of 180 million,according to FBR there are 2.98 Million registered tax payers and only 1.96 million filed their return of income till 31 Dec 2011. FBR is one of the biggest problem for the economic mess in the country.According to ex- FM Saukat Tareen, the corruption/evasion in FBR is estimated at Rs 500 billion. Yet all officers in FBR get 100% extra basic salary...... Please someone save this country......................................................

Syed A. Mateen | 13 years ago | Reply The government should keep on subsidizing for petrol, electricity, gas and water tariff and provide relief to a common man in the country. I am not bothered whether Hillary Clinton, IMF or World Bank likes it or not. Pakistan must stop taking dictation from US, IMF and the World Bank as we must take all steps in the country to help out the poor and ordinary people of Pakistan and not to please international community. First of all the federal and provincial governments should find ways and means to reduce its expenditure and every one in the country who so ever is earning must pay tax. Unless government will not eradicate the menace of corruption from the government departments, it cannot earn adequate revenues to run the show. Why government has not as yet imposed tax on the big agriculturists who have hundreds of acres of land and does not pay a single penny tax? People elect their representatives from respective constituencies and send them to assemblies so that they should protect the interest of a common man in the country. But on the contrary, the elected representatives when become MPA’s, MNA’s, Senator’s and Ministers they work in their own interest and forget the poor people of Pakistan who stand in long queues to elect their representatives whenever general elections are held. If government cannot provide relief to a common man, then people will be compelled to look towards the political parties sitting on the opposition benches in order to get relief, instead of looking towards the government. Now Prime Minister Gilani after being refused by PML(Q) and PML(N) will be going back to MQM to seek its support in order to maintain majority in the parliament. Here, neither Hillary Clinton, nor the IMF and World Bank can support the Prime Minister to get support of political parties sitting on the opposition benches to maintain majority in the parliament and avoid a vote of no confidence. The government has now learned the lesson and should maintain cordial relations with all of its coalition partners and political parties sitting on the opposition benches. We need to formulate a policy that no bill in the parliament should be approved by the legislators sitting on the treasury benches alone and the government must have at least 95% votes of the parliamentarians in order to increase the prices of petrol, electricity, gas, water and other utilities to save a common man from committing suicide.

Syed Nadir El Edroos | 13 years ago | Reply This is such a poor decision. Who is this going to benefit? It will cause even more inflation! The government instead could have offered to increase targeted development expenditure equal to the amount raised from the higher tax prices or a move similar. The government has succumbed to the opportunism of opposition parties which will do little to help the country. Commodity prices are charging upwards, for how long can they keep petroleum products pegged at the current levels? If any other political party was in power what else would they have done!

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