AVOIDABLE IMPORTS FUELING INFLATION

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
Oct 11 - 17, 20
10

Though global commodity prices have come down significantly over the last couple of years but they have already plunged many of the developing economies into serious economic crisis. Added to that was sub-prime loans crisis originating from the US, pushing the entire world into recession. At present, economists are worried about double-dip recession but Pakistan seems to be engulfed in its own problems, which can only be termed 'mismanagement'. Profitability of Pakistani commercial banks is being affected due to rising delinquencies. Enterprises are suffering because of rising cost of doing business. Competitiveness is eroding due to load shedding of electricity and gas despite colossal rise in tariffs and volatile political situation and precarious law and order situation are making lives of Pakistanis miserable. More and more people are being pushed below the poverty line and already low savings to GDP ratio has added salt to injuries.

During the last financial year, Pakistan imported some of the commodities that too at very high prices, eroding country's foreign exchange reserves and forcing the government to pay billions of rupees subsidies and adding to budget deficit. A few products deserving specific mention are 1) sugar 2) urea and 3) POL products.

Even before commencement of crushing season, it was known that sugarcane was not sufficient and industry suggested to the government to allow duty free import of raw sugar. Contrary to the suggestion, Trading Corporation of Pakistan was ordered to import refined sugar at a time its global prices were at the peak. At an average, the government paid up to Rs25 per kilogram subsidy on the imported sugar sold through Utility Stores. Cognisant of the situation traders also took advantage and started demanding higher price in the wholesale and retail markets and price of sugar at present hovers around Rs85 per kilogram. Needless to say that mishandling the situation ate into the country's foreign exchange and forced the government to pay billions of rupees subsidies but consumers have to bear the brunt.

While it is true that commencement of some new fertiliser plants was delayed but curtailing gas supply of fertiliser plants and diverting it to power plants forced the country to import over 1.5 million tons urea, which eroded foreign exchange reserves and also forced the government to pay huge subsidies. Experts have been saying for ages that burning gas in power plants is the worst use of natural gas but policy planners are adamant at running power plants on gas to bring down the cost of generation.

While hardly any effort is being made to contain pilferage, rising electricity tariff provide the incentive to pilfer electricity. Some of the cement plants are still running on natural gas in a blatant violation of the policy announced many years requiring the manufacturers to switch from gas/furnace oil to coal.

The government is adamant on collecting billions of rupees as oil and gas levies to compensate for the shortfall in revenue collection. According to some experts, two-thirds of retail prices of POL products consist of government levies. Very intelligently some of the taxes have been merged in the cost of products. Added to this is the policy of determining deemed margins of refineries. The fallout is that imports often become cheaper and oil marketing companies prefer to import some of the products rather than buying those from the local refineries. As a result the average capacity utilisation of local refineries hover around 70 per cent, which is far from satisfactory and adds to the losses being posted by the refineries.

Failure to add new hydropower plants and heavy reliance on thermal power plants has increased Pakistan's oil import bill manifold. Pakistan has also not been able to exploit its coal potential. It may be true that mining coal from Thar fields is difficult but the country has failed in constructing carpeted roads up to the areas from where coal has to be excavated. Pakistan's sugar industry is capable of generating low cost energy as well as producing ethanol for producing E-10 but none of the options has been exploited.

Pakistan can also produce bio-diesel through canola oil and/or corn oil. There is a desperate need to bring down cost of public transportation by bringing cost of diesel and production of bio-diesel is a prudent option. However, it seems that oil-marketing companies are not cooperating with the government in promoting use of E-10 and bio-diesel. One fails to understand the reasons for opposing sale of these products.

In order to contain and bring down inflation bringing down cost of energy products is a must and all the options have to be exercised. These include running thermal power plants on indigenous fuels, improving efficiency of thermal power plants, containing transmission and distribution losses of electricity distribution companies and UFG of gas marketing companies and increasing use of E-10 and bio-diesel.

However, none of these objectives can be achieved unless the government learns to make prudent decisions. One of the worst examples of bad decisions is allowing rental power plants (RPPs). Not only the decision was bad, it was made the worst by allowing import of obsolete power plants and offering fabulously high bulk power purchase rate. Other irregularities were making advance payments and the permission to use gas as fuel. The case being reviewed by the Supreme Court and it is expected that supremacy of law would be maintained but all those found guilty of corruption should be dealt with according to the laws of Pakistan.

Depreciation of rupee also adds to costs of imported products. This issue also needs to be addressed. The basic reason for depreciating rupee is demand exceeding supply. To overcome the issue in the short-term import of unnecessary and luxury goods should be curtailed. The decision has to come from Pakistanis and not by the multilateral donors.