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Oil prices and the budget deficit

An attempt to contain budget, deficit a condition of the IMF

By SHABBIR H. KAZMI
Jan 01 - 14, 2001

The Government of Pakistan (GoP) announced yet another hike in POL prices at the end of December 2000. The decision was vehemently opposed as it was expected to adversely affect the domestic economy and exports due to cost pushed inflation. This increase in prices seems to be a paradox. The rationale given at the time of announcement of price hike seems contradictory to what has been said by Abdullah Yousuf, Secretary, Ministry of Petroleum recently. The general feeling is that the GoP has once again succumbed to the IMF pressure.

As such the GoP is required to review POL prices and adjust them in line with their international prices. Under the IMF Stand-by Agreement signed recently, the GoP committed to review the POL prices on December 15, 2000 and subsequently review the situation on March 15, 2001 and June 15, 2001. According to the official announcement, since the oil prices during the past quarter were still high, though coming down from US$ 33 per barrel to the current level, the GoP considered it appropriate to announce the prices increase. This is a totally absurd rationalization. In reality the prices should have been fixed keeping in view the price trend during January-March 2001 period and not the past prices.

According to reports the recent price hike is part of the agreement with the IMF. The condition was included in the agreement with the IMF and facilitate rescheduling of debt with the Paris Club, besides paving way for loans from other donor agencies. i.e. the World Bank and the Asian Development Bank. According to the agreement with the IMF, the POL prices have to be re-adjusted quarterly, in line with the prices in the international markets. The new prices are based on the daily average of crude oil prices that Pakistan paid for buying oil from the international market during September to November in the previous year.

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Oil prices and the budget deficit

An attempt to contain budget, deficit a condition of the IMF

By SHABBIR H. KAZMI
Jan 01 - 14, 2001

The Government of Pakistan (GoP) announced yet another hike in POL prices at the end of December 2000. The decision was vehemently opposed as it was expected to adversely affect the domestic economy and exports due to cost pushed inflation. This increase in prices seems to be a paradox. The rationale given at the time of announcement of price hike seems contradictory to what has been said by Abdullah Yousuf, Secretary, Ministry of Petroleum recently. The general feeling is that the GoP has once again succumbed to the IMF pressure.

As such the GoP is required to review POL prices and adjust them in line with their international prices. Under the IMF Stand-by Agreement signed recently, the GoP committed to review the POL prices on December 15, 2000 and subsequently review the situation on March 15, 2001 and June 15, 2001. According to the official announcement, since the oil prices during the past quarter were still high, though coming down from US$ 33 per barrel to the current level, the GoP considered it appropriate to announce the prices increase. This is a totally absurd rationalization. In reality the prices should have been fixed keeping in view the price trend during January-March 2001 period and not the past prices.

According to reports the recent price hike is part of the agreement with the IMF. The condition was included in the agreement with the IMF and facilitate rescheduling of debt with the Paris Club, besides paving way for loans from other donor agencies. i.e. the World Bank and the Asian Development Bank. According to the agreement with the IMF, the POL prices have to be re-adjusted quarterly, in line with the prices in the international markets. The new prices are based on the daily average of crude oil prices that Pakistan paid for buying oil from the international market during September to November in the previous year.

Many analysts do not accept this rationalization. These analysts say that the IMF only wants from the GoP to meet the condition, reducing budget deficit, and the Fund may be least interested in how it is met. Therefore, the GoP should have f