HIGH ELECTRICITY & PETROLEUM PRICES HAMPER ECONOMIC GROWTH

AMANULLAH BASHAR
July 13 - 19, 2009

Electricity consumers were liable to bear 19 percent increase in tariff during 2008-09 and are fearfully looking at yet another increase of 17 percent during 2009-10 as government may phase out subsidy of Rs56 billion on electricity.

The popular decision of staying the increase in electricity price by the Apex court was a pleasant surprise for the hard hit electricity consumers as the decision to suspend the increase was widely welcome across the country except FATA people who are least bothered about the increase or decrease in the electricity prices as the their bills have to be paid by the government.

However, the consumers have to abide by whatever the government feels good for fixing the electricity prices or generating revenues for bridging the budgetary deficit.

The price of electricity is a serious issue which brings serious economic social implications especially for the average income group as well as the industrial consumers suffering from exorbitant electricity prices which on one hand disturbing the kitchen budget of the common man while on the other hand rendering the export oriented industries uncompetitive in the highly price conscious export market.

Yet another ugly face of the implications of exorbitant electricity prices is the increasing number of power theft also called as line losses in soft terms across the country, estimated around 40 percent in WAPDA and KESC systems. Whenever the issue of power theft was discussed the KESC or WAPDA the two utilities were least bothered about the issue despite the fact they were apparently suffering line losses of 40 percent. Their indifferent attitude over the issue gives a feeling that the losses are being recovered from the genuine consumers through inflated bills.

The problem of line losses or power theft is unlikely to be resolved unless the electricity prices are made affordable. In this country where the per capita income is so low and around 40 percent of the population living below the poverty line one should not expect them to pay such a high tariff rate of electricity which sometimes exceeds to the monthly rental value of their houses. People who claims to be the representatives of the poor should ponder over this issue subtly and the equation between high cost essential commodities like electricity and petroleum prices and level of per capital income in Pakistan.

IMF TRANCHE

The timing of the decision and the swift counteraction of the government for restoring the Petroleum Development Levy (PDL) has raised a few concerns as the final decision on petroleum pricing is still pending in the Supreme Court.

It may be mentioned that the latest move on increasing the petroleum prices is being looked at in business and political circles as an indicator of disagreement between different organs of the state i.e. executive and legislature.

It is learnt that the factor behind the swift change in petroleum prices under Presidential Ordinance is to ensure disbursement of the pending $840 million tranche for which Pakistan is currently presenting its economic plan to IMF.

Knowledgeable sources were of the opinion that the swift reaction by the government was in consideration of the ongoing meeting with IMF where Pakistan's budgetary balances were under discussion. It may be mentioned that petroleum prices were raised again via presidential ordinance by restoring PDL.

However, people in general were stunned over such an instant reaction whereby the petroleum product prices had been inflated again through Presidential Ordinance as the Petroleum Development Levy (PDL) had been imposed on petroleum products with immediate effect. This move came following the temporary suspension of carbon surcharge by the Supreme Court.

Financial analysts however have their on calculations as they feel that the key focus of the move is to compensate for potential revenue shortfall of PRs110-120billion (8% of tax revenue) in financial year 2010 that could have emanated in case of abolishment of carbon surcharge.

It may be mentioned that PDL has been implemented in the same quantum of carbon tax i.e. Rs10/litre on Motor gasoline and Rs8/litre on HSD.

Contrary to past practice of variable PDL, the levy has been implemented in fixed amount for the time being. The practice of fixed PDL could also be made permanent in the days to come.

The timing of the decision and the swift counteraction of the government however has raised a few concerns among the consumers. However, the final decision on petroleum pricing is still pending in the Supreme Court.

In addition it also highlights the challenge facing economic managers in Pakistan where avenues for fiscal balancing remain limited and quick-fix attempts are likely to prevail in the immediate future.

TRANSPARENCY IN PETROLEUM PRICING

Transparency in petroleum pricing and deregulated petroleum products seems to be future scenario of the POL products in the wake of recent developments which resulted in swift changes in oil prices.

Informed sources in the oil sector said that recent developments regarding swift changes in petroleum prices were likely to move towards price deregulation of POL products in Pakistan.

Well placed sources in oil sector had a strong opinion that the recent development in the oil sector might culminate into increasing transparency in pricing by removing potential anomalies, the major source of concern for the consumers across the country.

It may be mentioned that the prices of petroleum products has been a disputed issue in neighboring India, as according to reports, it was under active consideration of the Indian government to deregulate the petroleum products to allow the market forces to determine the prices.

Meanwhile, the removal of carbon surcharge by the Supreme Court and re-introduction of petroleum levy via Presidential Ordinance and recommendations of Judicial Commission on petroleum product prices are dampening the spirit of capital market.

The stock market players have expressed their concerns on potential changes in pricing formula and margin may potentially dampen stock prices besides shattering the confidence of the investors.

It is interesting to note that in the last 10 days, petroleum prices have been changed three times. Currently, the Government targets to collect Rs122 billion i.e. 8 % of Federal Government tax revenue from petroleum products other than levy of General Sales Tax (GST).

The Judicial Commission, it may be noted has submitted its report to the Supreme Court's bench hearing a case on petroleum product prices. However, sources were of the view that the recommendations/suggestions of the Judicial Commission were not binding on the government and added that the final decision on the petroleum prices case might determine the likely changes in ex-refinery price formula and the marketing margins.

According to informed sources the government is likely to make Petroleum Levy a fixed consumption tax contrary to past practice of variable tax. This would imply volatile end product prices though would help the government in materializing its tax collection target.

INFLATION

The persisting higher core inflation is likely to restrict the central bank to follow an aggressive rate cut policy to bring down the interest rate of the banking sector generally expected by the trade and industry.

As far as price inflation was concerned, it has started showing its teeth soon after the exorbitant increase in prices of petroleum products. With the increase in petroleum prices the vegetable vendors, grocery shops, tea stalls, taxis and auto rickshaw operators are finding it justified to increase their prices.

However, according to financial analysts a 200bps decline in discount rate is likely in upcoming policies review sometimes this week as the inflationary trends are expected to subside in the coming months.

On policy front, the single digit inflation would pave the way for SBP to cut its discount rate. However, as against the market expectations of 300-400bps reduction in policy rate which seems imperative to get rid of the economic slowdown, the financial experts foresee at most 200bps cut in discount rate during 2009.

The market sources say that June 2009 is likely to be the 5th consecutive year of declining inflation numbers. It was also visible in May 2009 CPI (Consumer Price Index) numbers where inflation was recorded at 14.39% versus 19.27% observed in the corresponding month of last year.

The declining trend is likely to persist in next few months, where single digit inflation during ensuing August and onward period is very much on the card. The financial experts said that June 2009 CPI are expected at 13.15% FY09 which is likely to be concluding with a full year inflation numbers at 20.8%, a 34 year high as per available data.

On the other hand, mainly due to the higher base effect, the monthly (June 2009) CPI is anticipated at 13.15% versus 21.53% observed in the corresponding month of last year.

The inflation is to move in a zigzag fashion during the year as the downward trajectory of the inflation is likely to continue till October 2009, while after that the inflation will once again start to move upward the experts said. On that basis, it is assumed that a 75bps would increase on MoM basis in the inflationary movement. However, in the coming month of August 2009 the inflation is likely to get into a single digit which will persist till Dec 2009.