Apr 11 - 17, 2011

The biggest surge in fuel prices of up to 13 percent from April 1 hit the consumers like a petrol bomb invoking strong criticism from cross- section of society across the country. Grappling with a burgeoning budget deficit, the cash-strapped government was forced to take the unpopular decision to raise fuel prices, as it would have to absorb an additional burden of Rs9 billion in case the prices were maintained at the previous level. Critics say that price hike in petroleum products will further escalate food prices adding to the sufferings of consumers, who are already facing problems owing to rising cost of living.

The government announced to raise POL prices reflecting the rise in global crude oil prices. Petrol price has been raised by Rs6.98 per liter, while high speed diesel price by Rs10.67 per liter. The new price of kerosene oil after Rs9.65 increase is now Rs84.10 per liter, while high-speed diesel price has been hiked by Rs10.67 to Rs92.89 a liter and light diesel after raise of Rs9.7 will now be available at Rs78.98 a liter.

State Bank of Pakistan (SBP) has warned that latest taxation measures and increase in domestic prices of petroleum products will raise inflationary pressure on the economy. The central bank's inflation monitor has warned the declining trend in headline inflation, which dropped from 14.2 percent in January to 12.9 percent in February, may be reversed in the months ahead considering the recent increase in fuel prices, upward adjustment in electricity tariffs and the government's latest taxation measures.

Though oil prices in international market have increased by up to 26 per cent during four- month period (December to March) yet the government only passed 5 per cent impact on to consumers under political pressure. The increase in fuel prices by up to 13 percent could create fresh problems for the three-year old Prime Minister Yousuf Raza Gilani-led coalition government. Some analysts argue the pressure is being exerted on the present government to take most of the tough economic decisions, which cannot be politically absorbed, to discredit the ruling PPP in order to provide a stable economy to its successors. The IMF $11.3 billion Stand-By-Arrangement (SBA) for Pakistan is already facing suspension from May 2010 and fifth review is also facing delay in its completion owing to non-observance of the IMF performance benchmarks.

Political unrest in the Middle East has endangered smooth supply of oil to the global markets, and pushed the price as high as $120 per barrel from $80-85 earlier. Some analysts argue that fuel price increase in Pakistan, which depends 90 per cent on imported oil, was must to avoid further deterioration of fiscal management already facing severe shortage of revenue.

The latest rise in petrol prices is likely to increase inflation further. Political parties and business leaders have demanded the government to withdraw the increase immediately, as they fear the flood of high inflation would hit the entire segments of the economy, despite raising unemployment to record peak in just few months. Business community laments that abrupt increase in petroleum product's prices would further disturb the industrial sector, especially manufacturers, already hard hit by high input costs including prolonged gas, power load shedding as well as weak rupee against dollar.

Some analysts identify pass-through of higher oil prices by the government along with higher electricity tariffs due to greater reliance on furnace oil-based power plant as prime reason behind higher inflation in last three years. The consumer price index (CPI) inflation rose by 55 per cent in three years, as CPI index in March 2008 was 158.5 that jumped to 244.9 in March 2011.

The inflation has gone up due to increase in petroleum products prices, electricity and gas prices, which the government increased from January, 2010 as per agreement with the International Monetary Fund (IMF). The government kept the price of petroleum products unchanged for the past two months as a result of pressure from all the mainstream political parties. In January, Prime Minister Syed Yusuf Raza Gilani reversed an unpopular fuel price rise in a move designed to prevent his fragile government from collapsing.

Muttahida Quami Movement (MQM), the third biggest party in the ruling coalition, has strongly opposed the latest price increase, asking the government to withdraw the price increase. Last month, the government announced the reversal of 50 per cent on the 10 percent hike in POL product prices after hours-long negotiation with MQM leadership at in Karachi. The MQM quit the government in protest the last time fuel prices were raised in January and only rejoined the coalition after the hike was reversed. The government has reportedly assured the MQM leadership of reviewing its decision and a reduction in oil prices is expected this month.

The increase in fuel prices is deeply unpopular, hitting the poor hardest, and fraught with political risks of its own. The government has few options, on both economic and political fronts, according to some analysts. The government may cut expenses further, while boosting the income tax could be tougher than either raising energy prices or value added taxes, because the income tax disproportionately hits influential wealthy people.

The government would fuel inflation and the fiscal deficit if it does not reduce expenditure to bridge the revenue shortfall as a consequence of withdrawing the petroleum price rise.

Critics say that the economic managers have completely failed to convince the political leadership on implementation of the reformed general sales tax (RGST), and on passing the impact of global increase in petroleum prices in the domestic market. The economic team may now find it difficult to operate in the prevailing situation as pressure would begin to mount from donors for economic reforms. The country has so far received $7.6 billion from IMF, which has not given Pakistan any further installments since May.

The central bank governor has already warned that the higher remittances and exports have minimized external current account deficit but financing position without support of the IMF and donors could become an area of concern.