Oil, politics and prices

In the short term, drop in prices may give some relief, though it will not be enough to alleviate pains of the people

There are going to be those who will rejoice at the biggest cut in fuel prices in a decade, with prices dropping by up to 14.68 rupees per litre in some instances, but their joy is going to be short-lived. The government is under pressure on a number of fronts, not least the protests in Islamabad and other cities over the last two months. It has never looked like it was going to fall and there was never any possibility of the prime minister resigning, but the protests have highlighted a raft of concerns and clearly have considerable public support. This has rattled the status quo, so carefully crafted over generations of Pakistan’s political life. The government has resorted to an unashamedly populist move in cutting fuel prices. The move is in line with a drop in global oil prices in recent months — coincidentally, the months when the protests were at their height — and have fallen by 25 per cent since June 2014. Prices are unlikely to drop below $80 a barrel and will inevitably rise again.

In the short term, the drop in prices may give some relief, although even this will not be enough to alleviate the pains of a weary population. What we really needed was a range of economic reforms — reforms that the current dispensation has steadfastly avoided thus far, in particular, any meaningful reform of the taxation system. The government is heavily dependent on borrowing, often from itself in the form of the State Bank of Pakistan, and a disproportionate slice of the GDP goes towards debt servicing. The reduction may also be something of a shot in the foot as the government is likely to lose Rs1.5 billion in revenues in November alone. True, petroleum sales are going to rise, but whether the benefits are going to trickle down in the form of lower transport costs generally, or lower fares on all forms of passenger transport specifically, remains to be seen. Much of our electricity is generated by burning oil, and it will be at the very least interesting to see if lower oil prices mean lower bills. Cheap petrol is not the answer — but painful reform is.

Published in The Express Tribune, November 2^nd, 2014.

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