VIEW: Petrol politics —Usman Mujib Shami - Wednesday, March 16, 2011

Source :\03\16\story_16-3-2011_pg3_4

The hike in international oil prices left the government facing the dilemma of whether to bear the increase by itself or to pass it on to the domestic consumers. It decided on the latter

The recent hike in the prices of petroleum products provided yet another opportunity to the media and opposition to deliver fatal blows to an already beleaguered government. The bulk of the country’s population, quite expectedly and justifiably, rejected the price increase and mobs of flustered protestors were seen on the streets carrying banners condemning the government for its insensitivity towards the general public. The PML-N MNAs, quite understandably, also took the opportunity to flog the government on the floor of the lower house in a bid to cash in on popular sentiment. However, what might seem worrisome for the PPP is that its allies (namely the MQM and ANP) also decided to express dissent, and vehemently demanded a reversal of the decision. The MQM went a step further and threatened to break the already fragile coalition. Ultimately, as expected, the government decided to show flexibility and, on conclusion of the dialogue between the MQM and PPP representatives, the finance minister announced the decision to cut the increase in prices by 50 percent. This was the second time in two months that, succumbing to domestic and political pressure, the government had to reverse the increase in petroleum prices.

It is important to recognise that any increase in petroleum prices is an international phenomenon. The political instability in the Middle East is fuelling speculation for major supply disturbances in the future and thus crude prices worldwide are having a bull run though the actual drop in supply is yet negligible as reports suggest that up to one third of Libyan oil output could be disturbed by the unrest. Libya is the world’s 12th largest exporter of oil, accounting for two percent of the world’s supply. Its major customers like Spain, France and Italy could face short term supply shocks but the impact on world markets would be minimal. However, fears of this unrest engulfing the rest of the Middle East are sending jitters down the spines of policy makers and investors. Almost 40 percent of the world’s consumption of black gold is provided for by this region. Under such circumstances, the increase in global oil prices seems quite natural. A few months ago, crude oil’s price in the international market used to be around $ 90 per barrel; currently, it is hovering around the $ 120 mark.

The hike in international oil prices left the government facing the dilemma of whether to bear the increase by itself or to pass it on to the domestic consumers. It decided on the latter, and had quite a few reasons to justify the choice. The fact that Pakistan is currently facing one of the most complex and deeply rooted economic crises in its history is no secret. The fiscal deficit for the first six months of the current year crept up to the alarming level of Rs 490 billion (around 2.9 percent of the GDP). The country’s economy lacks the strength to sustain such a towering deficit. Official sources claim that the government has lost Rs 13 billion from October 2010 to February 2011 as it restrained itself from increasing the domestic prices of petroleum. Despite the increase, it fears a loss of another Rs 5 billion during the month of March; the deficit is likely to be much greater after a 50 percent cut in the increase. The joint press conference by the PPP and MQM representatives did little to outline the sources of revenue needed to bridge the gap.

It might be interesting for readers to know that despite the persistent increases, the price of petrol in Pakistan remains among the lowest in the region. In India, petrol prices range from Rs 58.37 per litre in Delhi to Rs 63.36 per litre in Chennai. In equivalent Pakistani rupees, it ranges from Rs 111 to Rs 120. Similarly, in Bangladesh, the per litre price is around 90 takas (equivalent to almost Pakistani Rs 108). Though in India diesel and in Bangladesh CNG are much cheaper, the pressure from economists for adjustment is mounting. Afghans also have to pay slightly more than one dollar in order to procure a litre of petrol. The prices in different countries of the region signify the relation of domestic prices with the international market.

Rates of petrol are fixed at much higher rates in many developed countries. For example in Turkey petrol is sold at around $ 2.4 (Rs 204). Comparison with the developed world will not be just as their people enjoy a much higher purchasing power due to high income levels. However, the prices in developed countries can be used for understanding trends in the international market.

We need to realise that merely protests and political point scoring cannot solve our economic woes. The government has failed in collecting its due share from the rich (a fact evident from a meagre tax to GDP ratio of 8.5 percent), thus it has resorted to simply persuading the State Bank to print more money in order to bridge the fiscal gap. Resultantly, inflation has been on the rise ever since the inception of the current government, and can easily give way to hyper-inflation if the current practice persists. Restraint in passing the increase to the public will only result in widening the fiscal gap leading to higher levels of inflation and depreciation in the value of the rupee. The government lacks resources to provide any subsidy on petroleum products. Instead, the focus should be on exploring new venues for revenue generation, and improving the taxation system. Non-productive expenditure also needs to be slashed urgently. The opposition and ruling parties need to realise the gravity of our economic challenges and work out a road map for coping with them. Our much trumpeted national sovereignty can only be achieved through economic sovereignty.

The writer is a graduate of Institute of Business Administration, Karachi. He can be reached at

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