FLOODS CAUSE ECONOMIC DISASTER
ONE-TIME FLOOD LEVY IS LIKELY ON GAS AND PETROLEUM PRODUCTS
Aug 30 - Sep 05, 2010
A one-time flood tax or levy on energy products including gas and petroleum products is under consideration of the government to mitigate huge losses and a serious dent to the macroeconomic targets caused by the floods across the country.
The rural economy wrecked in the wake of flash floods has seen a 20 percent damage to the crops which consequently affect the GDP growth targets as well as revenue targets of Rs1.7 trillion for the financial year 2011 besides making a huge dent in the banking sector which has no option but to go for provisioning of over Rs50 billion loans infected by the floods in the agriculture sector.
However, the trade and industry as well as the people at large are in no mood of bearing yet another burden on gas, gasoline and diesel as their current prices are already on higher side when compared with depressed consumer purchasing power in the face of mounting inflation, higher interest rate and depressed exchange rate in the country.
The trade and industry is of the opinion that the private sector in Pakistan has extended open hearted financial support to the flood relief fund instituted by Prime Minister. In addition, considerable flows of relief funds from external resources especially the friendly countries are expected.
They said that instead of adding to the burden on the private sector by raising cost of energy, it is the time to allow domestic economic resources to activate the wheel of industry to earn more and more for the country to overcome the flood consequences and the IMF should also soften its conditions in the given circumstances to give a breathing space to the economy.
It is learnt that exploration companies operating in Pakistan have increased exploration activity due to high rate of returns and there are positive signs of augmentation in domestic production of gas and oil in the high prospect areas of Balochistan and offshore concession blocks.
Pakistan Petroleum Limited (PPL) is noticeable example in exploration and appraisal exposure in two most prominent exploration successes in Tal with 28 per cent stakes and Nashpa 26 per cent stakes, and tight gas-reserve potential.
It may be mentioned that PPL has spudded in 28 exploration wells in the past five years, which translates into six wells per annum. It has an impressive discovery record of 40 per cent ñ i.e. 11 discoveries. In the past five years, PPL has achieved a reserve-replacement ratio of over 180 per cent based on published 2P reserves data.
Under the present gloomy situation the inflated hit economy deserves softening of the energy prices to block the way of the high tide inflation as a result of food and energy inflation which always have a multiple effect on general prices.
FLOOD TO LOWER DEMAND FOR AUTOMOBILE
The vicious cycle produced by inter-play of inflation, exchange rate, interest rate etc. may cause a serious impact on the domestic industry especially the automobile which had started showing positive sign of improvement for quite sometimes in the country.
However, the floods may bring a dramatic change in the auto industry with the drastic cut in demand as the major buyers of new cars were from the agriculture income earners. Another factor which might affect the auto industry is increasing cost of inputs as well as appreciation of the yen against Pakistan rupee forcing the auto producers to increase prices to avoid losses.
Informed sources told Page that import duty on completely knocked down cars is likely to be lowered by 30 percent with a view to relieve foreign exchange pressures, and to restrict possible increase in car prices in the face of appreciating yen against Pak rupee.
The government, according to the sources, is also considering to raise the age limit on import of used cars from current two years to four years which may enhance the arrival of imported used cars in the country, sources said.
It may be noted that in view of rupee depreciating against yen and dollar the domestic automobile industries are left with no option but either to raise prices of their cars or comprise on reduced margins.
Actually the automobile industry is confronted with two pronged issues at the moment; one is increasing cost of production primarily due to yen appreciation and decline of sales demand due to flash flood which has severely affected farm income. The automobile industry was enjoying sales growth of at least 40 per cent exclusively from the agriculture buyers prior to onslaught of flood devastations.
It is estimated that domestic car producers will need to raise prices by another four per cent to retain their margins which however seem to be an uphill task given weak demand prospects.
Apart from weaker demand for new cars in the wake of flood devastations at the massive scale to the economy the Yen appreciation is seen yet another key risk for car prices as the Yen has already appreciated from its average of Re0.92 in the second quarter of 2010 to Re1.
It may be mentioned that the automobile industry is booming in neighbouring India where smaller car producers have reaped rich profits during financial year 2010 with the improved signs in the economy, reassuring GDP growth to over eight per cent.