Market mixed over cut in fuel, energy prices

Some traders laud move, others fear it will spark inflation

KARACHI:

Businessmen and industrialists have welcomed Prime Minister Imran Khan’s announcement of lowering down petroleum prices and power tariff and maintaining them at that level (revised) over the next four months.

They, however, cautioned that the decision to cut the energy price was politically motivated which would worsen macroeconomic outlook of the country and may encourage the International Monetary Fund (IMF) to consider suspending its ongoing loan programme worth $6 billion once again.

The premier on Monday announced to cut petrol and diesel prices by Rs10 per litre each, electricity prices by Rs5 per unit and exempted the IT sector from all taxes till the next federal budget 2022-23 (effective from July 1, 2022).

“Prime Minister Imran Khan’s decision would relieve the industry,” Karachi Chamber of Commerce and Industry (KCCI) President Muhammad Idrees said while talking to The Express Tribune.

The cut in energy prices would offset the impact of the latest hike in power tariff of over Rs5 per unit in the name of monthly fuel cost adjustment. “The decision will improve the cost of doing business,” he projected.

Pakistan Business Council (PBC) CEO Ehsan Malik, however, termed the decision politically motivated.

 “They are announced in response to mounting political pressure from opposition parties, who have launched a march towards Islamabad to topple PM Khan’s government,” he said.  “Energy prices are cut to counter the no-confidence motion against PM Khan (in the parliament),” he added.

Pakistan lacks fiscal space to subsidise energy prices. The international benchmark crude oil ‘Brent’ prices have hit an eight-year high of $105 a barrel in the wake of the Russia-Ukraine crisis compared to around $70 per barrel a year ago. “Therefore, the increase in subsidy payments will further widen the fiscal deficit,” he said.

The decision to subsidise energy prices was in contradiction with the government’s agreement with the IMF, under the ongoing $6 billion loan programme. “We have agreed with the IMF not to subsidise energy prices.”

Accordingly, IMF may consider suspending the ongoing loan programme for the third time since the programme started in July 2019.

“If IMF reacts as per market expectations, then it will badly hurt the domestic economy,” he cautioned and added that “staying under the IMF loan programme is the only way forward at present.”

Suspension of the programme would multiply the problems of the cash-strapped government and impact industrial output as well, he underlined.

“Friendly countries like China and Saudi Arabia have already given whatever they could under the recent bailout packages and expecting more from them does not seem practical,” he said.

The reduction in energy price would multiply the inflation reading, he hinted.

 “To better manage businesses and the economy, the government should pass on the increase in global petroleum prices to domestic end-consumers,” he said.

“Expecting anything (loan and grant) from Russia in the wake of PM Khan’s visit will not be rational, as Moscow itself would be in trouble after the world imposed economic sanctions on it following the attack on Ukraine,” he said. 

Industries were working under the provided circumstances. Economic activities were well in line with the government and the central bank’s parameters. On the other hand, foreign investors would wait for clarity on the geopolitical crisis to invest around the world including Pakistan, he said.

“Every $8-10 per barrel increase in international oil prices raises our energy import bill by $2 billion a year,” he underlined, adding that the increase in global oil prices to over $100 per barrel has already increased Pakistan’s import bill and its trade deficit in the first seven months (July-January) of the current fiscal year.

Pakistan’s current account deficit hit an all-time high of $2.6 billion in a single month of January 2022.

“While it may lead to some short-term political gains and relief to masses, if implemented properly by having producers and manufacturers pass on to end-consumers, it raises fears about the next IMF review,” Alpha Beta Core (ABC) CEO Khurram Schehzad said.

 

Published in The Express Tribune, March 1^st, 2022.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.