AN oil price hike is not something anyone likes to see. It puts economic growth at risk, and Pakistani consumers are already hurting from inflation that has reduced their ability to spend on food, transportation and utilities, let alone health and education. So Thursday’s announcement that petroleum prices are being raised by up to 13 per cent comes as distressing news. But the fact is that the government had no choice; given significant increases in international oil prices, exacerbated by tensions in the Middle East, it lost Rs35bn by keeping domestic prices stable from December through February and in March by limiting the increase to five per cent. Continuing to fund the difference would increase public debt and worsen the fiscal deficit. It would also further complicate negotiations with the IMF, which has demanded the removal of subsidies.
But external factors do not bear sole responsibility for this painful adjustment. Mismanagement of the economy as a whole has created a situation in which the government cannot afford to protect its citizens from higher fuel prices. Tax collection remains at unacceptably low levels, and certain large sectors of the economy enjoy concessions due to lobbying and political interests. Public-sector enterprises continue to eat up billions. Ever so often the power sector’s ongoing circular debt problem requires an injection of government funds. This administration and previous ones have also failed to adopt long-term, forward-thinking measures to reduce our dependence on fuel, such as improving mass transit, shifting reliance from road-based to railway transport and increasing power generation from resources other than furnace oil. Meanwhile, hedging strategies to reduce our exposure to global oil price fluctuations have been suggested but not implemented, and a redesign of the oil-pricing formula to reduce the profits of oil refineries and dealers still remains under review. Regardless of external factors, Pakistan might have been able to reduce the impact on citizens if the economy had been handled better as a whole.
That said, what will not help at this point is a political reaction with little regard for economic realities. Political parties will be tempted to milk the price increase for popular support, such as in January, when the MQM’s intransigence led to the withdrawal of a proposed price hike. For the last few months, the government has reportedly been making an effort to educate both coalition and opposition parties on the need for raising petrol prices. One hopes this has laid the ground for cooperation on the economy rather than political attacks that will only hamper the government’s moves to improve the economic situation.
Source : http://www.dawn.com/2011/04/02/petrol-price-increase.html
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