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A multiplier effect on prices as a whole is feared

Dec 20 - 26, 1999

The Government has once again succumbed to IMF's pressure for a 10 per cent average increase in POL prices and thus has ignored its multiplier effect on cost of production in general and on porices as a whole.

It is not the IMF alone which asked the government to increase POL prices as a precondition for releasing the loan but the government's own interest is also involved in increasing the prices since the oil and gas sectors are being used as a major source of revenue for the government. The revenue generation under petroleum development surcharge was estimated at Rs72 billion last year and the yield this year is also likely to be in the same region despite of increase in international oil prices.

It is true that petroleum sector offers a good source of income to the government but at what cost ? is a serious question to ponder upon by the new team.

The government has promised that in future the prices would be adjusted on quarterly basis and the benefits of any reduction in international prices would be passed on to the consumers. But question is for how long we would rely on imported oil.

It is a hard fact that Pakistan is a market worth $2.5 billion every year for the oil producing countries, they would not like to lose this potential customer out of their hands, said experts in the oil sector. A powerful coterie, which is the beneficiery of the huge kickback on purchase of oil, is another factor which desires to see Pakistan as a permanent oil importing country. An effective crackdown on these elements of vested interest is also an uphill task for the new economic managers.

It is an irony that despite discoveries of oil and huge reservoirs of natural gas in the country, the oil import bill continues to remain more or less around $2.5 billion dollars in Pakistan. It is said that an attractive kickback in oil deals is one of the major reasons which precludes Pakistan from being self sufficient in this vitally important sector of the national economy.

The resolve of the Chief Executive Pervez Musharraf in his economic package to carry out an across the board accountability of the corrupt in the government may help get rid of the huge burden of oil imports if the strategic plan implemented in letter and spirit. Efforts are needed not only to accelerate the pace of development of large scale gas fields discovered in Sindh as early as possible but the earliest conversion of power generation from oil to natural gas. Similarly the agreement signed with Turkemanistan for import of gas through gas pipeline should also be taken into serious considerations by the economic team.

Pakistan is a rich country as far as its oil and gas potentials are concerned. The deregulation of the petroleum sector can do a magic as the greatest incentive to attract the foreign investors in this field.


Product Existing price Revised Difference
MS Rs24.40 Rs27.00 Rs2.60
HOBC Rs28.50 Rs32.00 Rs3.50
Premier Rs26.04 Rs29.00 Rs2.96
MTBE Rs34.05 Rs38.77 Rs4.72
SKO Rs10.50 Rs11.25 Rs0.75
HSD Rs10.66 Rs11.50 Rs0.84
LDO Rs 8.50 Rs.9.35 Rs0.85
JP-4 Rs11.50 Rs12.65 Rs1.15
FO Rs6070.50 Rs7285 Rs1214.50

This is the third increase in the petroleum prices since May 1998. Immediately after detonating the nuclear devices, the government had announced 25 per cent increase in the POL prices except for diesel. Another 10.5 per cent increase was announced just before the budget for 1999-2000 and now the recent increase is the third one within a period of 18 months.

According to an estimate, the ten per cent increase in POL prices may yield over Rs40 billion to the government revenue during the current financial year.

The increase in oil prices was expected much earlier in view of increase in international prices coupled with IMF's conditions for releasing the instalment of $280 million which is the part of the total tranche of $1.56 billion IMF credit line approved earlier this year.

For the past many years fuel surcharge has become one of the major revenue sources of the government. In the last financial year Rs74 billion were collected in the form of petroleum surcharges.

The last revision was made in May 1999, the international petroleum prices had gone up by over 50 per cent.

The government has made special consideration in reviewing the prices of diesel as it was used in agriculture and public transport.

The domestic petroleum prices were linked to the then border prices of 24 dollars a barrel, no decrease was ever made in these prices through at one point in 1997 the world oil prices tumbled to as low as 8 dollar a barrel. Let us hope that the present government fulfils the promise of fixing the oil prices in accordance with the rise and fall in the international prices.