Feb 16 - 22, 2009

In its all-out efforts to boost its revenue to meet the budget deficit, the Government took three decisions last week out of which two have directly hit the consumers, and the industry already in crises.  First was a decision not to pass on the benefit of the reduction in the prices of oil in the international market to consumers in Pakistan for the 3rd month as well i.e. January 2009. 

During these three months the prices of crude oil have fallen by about 50% in the international market.

Through the second decision the authorities decided not to decrease the lending rates by the banks for which the industrial sector suffering from rising input costs was making earnest appeals.  The third decision related to rise in regulatory duty on the import of 379 items considered luxury or non essential items. 

The prices of petroleum products were reviewed on fortnightly basis till December 2008.  The 31st of December was the 2nd fortnight when the Government, despite recommendations for a sizeable cut in the sale prices of petrol, and petroleum products, decided to keep the prices unchanged.  On January 2009, the Government announced a major shift to review of the prices on monthly basis. A source in the ministry of Petroleum told this correspondent on condition of anonymity that under pressure from Finance Ministry which was all out to boost its revenue by hook or crook to meet IMF conditionalities, the government has decided not to pass on any benefit to the consumers as long as possible. 

It was of the view that the public at large had mentally accepted the existing level of prices and there would be no uproar in the country if the present level of prices is maintained till June if possible. Through this mechanism the government may be able to meet the short fall in the revenue target fixed by the IMF for the financial 2008-09.  The tax collection efforts of the FBR do not hold promise to come up to that level. 

According to an estimate the government is earning an additional Rs15 billion per month by not passing on the benefit of reduced crude oil prices to voiceless consumers in an effort to meet the IMF's condition of limiting fiscal deficit to 4.2 per cent of gross domestic product (equivalent to Rs562 billion) in 2008-09.  In the wake of a substantial revenue shortfall in the first half (July-Dec) of the current fiscal year, the government is bridging the fiscal gap by not passing on the benefit of lower oil prices in the world market to the consumers. 

No relief seems to be in sight for people because the government is finding it an easy solution to continue with higher prices of petroleum products in order to cover the fiscal deficit. The government, sources said, was adopting ad hoc measures to avoid borrowing from the central bank and was arranging financing from other banks in order to meet the International Monetary Fund's condition. 

Chaudary Nisar Ali, Leader of the Opposition in the National Assembly while speaking at a meeting, alleged that the Government was making over 100% profits on sale of petrol and diesel.  Its imports were costing Rs29 and Rs 25per liter while it is being sold at Rs55+Rs50 per liter.  Oil and oil products are, at present, the most heavily taxed items having a direct bearing on inflation specially the food items, he said.

Newly appointed Governor of State Bank of Pakistan, Mr. Salim Raza, announced that the mark-up rate will remain at present level till inflation comes down.  Briefing newsmen during monetary policy announcement, he said that monetary policy will be reviewed every 3rd month instead of six months.  The Government is making all out efforts to bring down the inflation and stabilize the economy and this target will be achieved soon, he added.  He said that deficit in national budget and inflation were causes of all problems of the economy. "We do not have the habit of saving, and recovery of taxes was very limited," he added.

According to him, Pakistan's GDP growth rate had declined from 8 percent to 3.5 percent in the past one year. "In the world recession, 3.5 growth rate is also a blessing, because a number of countries is more affected by the international recession these days. Although the prices of essential items have not come down, but its pace of increase was under control," he added.

The SBP Governor said that to balance the budget deficit, the previous government took extensive loans from commercial banks. He said that on the other side consumer financing under easy terms and industrial loans were given on large scale, due to which inflation went up in the country.

"The present government has undertaken stiff monetary policy to correct things. At present, inflation rate in the country is 14.8 percent. If the rate of interest were not increased then surplus liquidity of government capital security would have been up by more than 10 percent."  Moreover, he said, in order to consolidate national economy, it was imperative to meet the Prime Minister's target of 40 percent decrease in government expenses, at all cost. "For this reduction, non-development expenses were decreased and reduction of POL products subsidies was essential," he added.

He said that for achieving this, one has to rethink on development outlays of projects and increase in the rates of taxes.  He observed that taxes were received in such limited terms in the country that the national budget was constantly in deficit. He pointed out that the people could receive the benefits of development only when the government has ample resources for development projects.

"Under the new monetary policy, the government, instead of commercial banks, would utilize cooperate bond market and equity market for financial resources. Bank deposit resources are integral to economic system and we would use them to supplement the national economy," he said.

The Economic Co-ordination Committee (ECC) that met under the chairmanship of Advisor to the Prime Minister on Finance Shaukat Tarin decided to raise regulatory duty on import of several items. It may be recalled that in July last year the government had imposed regulatory duty on 379 non-essential and luxury items. The objective at the time was two-fold.  First, to reduce the pressure on the then precarious foreign exchange reserve position as an increase in duty of non-essential or luxury items would, it was argued, reduce their demand in the local market with a corresponding decline in the quantity of imports thereby saving valuable foreign exchange. And, second, to raise revenue in an effort to reduce the 7.4 percent 2007-08 budget deficit that was acknowledged as one of the primary reasons for galloping inflationary pressures.

The recent decision taken at the ECC meeting to raise regulatory duty, therefore, is indicative of two rather disturbing facts: (i) that the foreign exchange reserve position remains precarious in spite of the 7.6 billion dollar stand-by arrangement with the International Monetary Fund out of which around 3.1 billion dollars had already been released to the government in November and (ii) there are concerns over meeting the rather ambitious 4.2 percent budget deficit target agreed with the IMF as against the 7.4 percent achieved in 2007-08. 

Pakistan has extremely porous borders. Thus any attempt to subsidise prices of essential items in Pakistani markets have, invariably, led to smuggling to neighboring countries with devastating implications, namely, that our government is subsidizing prices of essentials for the citizens of neighboring countries.

Policing our borders to stop smuggling has been a task that is simply too challenging given our long porous borders with India and Afghanistan. Thus the only viable policy option available to the government is to ensure that the prices of essentials not be subsidized to the extent that smuggling becomes attractive.  And, by the same logic, the government must ensure that the levy of duty is not so high that it becomes profitable for smugglers to smuggle these items into Pakistan. Thus one would have hoped that the ECC had deliberated on the prices of these products in neighboring countries and ensured that the domestic price not be too much above that prevalent in India or Afghanistan.

Be that as it may, it is significant to note that our governments, past as well as present, have exhibited a tendency to tax those sectors that are relatively easy to milk. Thus increasing duties and sales tax has become the norm as a means to raise revenue - taxes that are essentially regressive in nature and whose incidence is higher on the poor relative to the rich. What Pakistan needs is tax on say income of the rich landlords, not of the poor and medium income farmers, as well as on the stock markets in an effort to raise tax collections in an equitable manner.