Dec 03 - 09, 2007

LAHORE: Finally, the Oil Companies Advisory Committee on Friday enhanced the fuel prices effective from December 1, the first in 19 months, which will definitely increase inflation apart from hitting economic growth.

The government reviews fuel prices every two weeks, but despite increase in global oil prices, fuel prices were not enhanced in the country during the last 19 months to save the public from additional financial burden. The government had to give billions of rupees subsidy during this period to save public from financial burden for which the credit goes to the then government of ex-Prime Minister Shaukat Aziz.

Petrol and diesel prices were last raised on May 1, 2006 as they were cut slightly in January, but had been left unchanged since then.

According to caretaker Finance Minister Dr Salman Shah, the fuel prices adjustment will not be done in one go. We will be increasing prices gradually. He said the fuel prices were being adjusted according to budgetary targets. "We have to keep in mind many things - our targets, the state of the economy, and the inflationary impact," Salman said, adding that it is our economic policy and nothing else. He said the inflationary considerations and the impact on people have to be taken into account.

The analysts are of the view that continuous decline in consumption of white oil products also contributed towards the cut in the overall POL volume growth apart from the availability of alternates like CNG and LPG. White oil products also showed a positive growth of 14.5 percent with 987,000 tonnes in May 2007, mainly triggered by high-speed diesel (HSD) which is used by small power generators as well as by IPPs as an alternate to furnace oil.

They said the consumption of black oil grew by 24 percent with 815,000 tonnes off take during July-May 2007. The demand for white oil products (MS, HSD, JP-1-8-4, HOBC & Kerosene) declined in the current fiscal year, pushing up demand for black oil.

On the other hand, businessmen are of the view that taxes and duties on petroleum products are being projected as the major source of Government's revenues since about half of the cost goes to the national exchequer. It's a disgusting state of affairs that needs to be obviated.

"It will be appropriate for the Government to absorb the raise in oil prices in international market against its taxes and duties on petroleum products rather than passing it on to the people on a regular basis. The Government should charge minimum possible percentage for service charges and should not make it as a source of revenue generation, senior members of the Lahore Chambers of Commerce & Industry (LCCI) said.

According to them, linking petroleum prices with the international oil rates is also unjustified, because Pakistan is not purchasing oil based on daily market prices. The oil supply is based on previous agreements when the cost of oil in international market ranged between 20 to 30 dollars per barrel.

The sources also said the Petroleum Ministry had proposed an increase of Rs 8.6 per litre in petrol price and a hike of Rs 5.5 per litre in diesel price. The Government was bearing a huge amount of subsidy (almost Rs 13 billion per month) on the rise in international oil prices, they said, adding that the ministry had earlier proposed an increase of Rs 11.5 per litre in petrol and Rs 7.4 per litre in diesel prices, respectively.

According to its analysts, the government had projected an impact of 25 billion of rupees in 2007-08 but oil prices in the international market had increased manifold, defying government's expectations. The government had given over 37 billion of rupees in subsidies so far and could not bear the burden of such a huge amount.

Besides the Oil and Gas Regulatory Authority (OGRA), the World Bank had asked the government to end the subsidy to cap the petroleum prices. The oil marketing companies were also pressing to end the support given in the form of subsidy, the sources said.

According to All Pakistan Textile Association Chairman Mr. Adil Mehmood, the country's textile business was in a state of crisis for over two years, and that our Industry had not been unable to convince the previous Government that the crisis is growing and in time would be un-revivable. Textile has always played a vital role in the economy and today textile accounts for more than 64% of the total exports, and total industrial employment of more than 40%.

"For the last two years our textile manufacturing industry, especially the spinning sector, had been in deep crisis, due to the disproportionate increases in our costs of production. Gas prices have increased by 38% in 2 years; electricity cost increased recently by 10% with constant load shedding; and Banks have raised mark-up rate to 14%, an increase of 300%. Further expected increases would burden the sector", Mr. Adil said.

Highlighting some major problems, he said financial costs had increased 300% since 2004. "This single cost increase had been instrumental in the malaise that the spinning industry finds itself in. "Finance cost as a ratio of sales was 2.5% in Year 2004 and is 8% in Year 2007. Gas prices for captive power generation had increased 53% from Rs. 172 to Rs. 268 per mmbtu since 2004, and gas based power generation projects feasibilities were totally disturbed. "Recently this was brought down to Rs.238 per mmbtu still resulting in a net increase of 38%. Against this, the cost of gas for captive power generation in Bangladesh is aprox Rs. 80 per mmbtu i.e. 1/3rd of our cost for their power.

He said electricity rates had increased by 10% recently whereas the system seems to have become incapable of handling the power supply requirements of the Country. The quality of electricity- when there is electricity- is so bad that all of the sophisticated equipment starts malfunctioning. Rate increase, costs of power shut down and costs associated with machinery's parts destruction is becoming a formidable burden, he added.

The LCCI members including Ms Shamim Akhter, Mr. Irfan Qaiser said the Government had fixed an export target of 2007-2008 of US$19.2 billion. "They said expected increase in gas prices and increase in petroleum products will definitely put additional burden on exporters and they would have to face extra financial burden due to jump in transportation charges, therefore, achieving export targets would by a difficult task.