INFLATION SPAWNED BY INCREASING FUEL PRICES

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

Mar 14 - 20, 2011

Pakistan's fragile government could not face political pressure and announced to withdraw 50 per cent of the recent increase in petroleum products' prices, which were increased on March 1.

The inflation has gone up due to increase in petroleum products prices, electricity and gas prices, which the government increased from January 2010 as per the agreement with the International Monetary Fund (IMF).

Soaring inflation is actually cost-pushed, spawned by increasing prices of fuel, food, raw materials, transportation, construction materials, and elimination of energy subsidies. Analysts believe that the government is likely to lose the opportunity to avail the next tranche worth $1.7 billion of the IMF loan program in the current fiscal year 2010-11, which will end on June 30, after withdrawal of recent increase in oil prices.

They contend that it has become almost impossible for the authorities to convince and satisfy the visiting IMF team on its performance and commitment to the agreed reform agenda during the remaining four months of the current fiscal year.

The government continuously increased POL prices and power and gas tariffs under the IMF dictation, ignoring the plight of industry and the general masses. The government kept the price of petroleum products unchanged for the past two months as a result of pressure from all the mainstream political parties. In January, Prime Minister Syed Yousuf Raza Gilani reversed an unpopular fuel price rise in a move designed to prevent his fragile government from collapsing.

The government had to take a U-turn again on fuel price hike amid growing criticism and pressure from the opposition and allied parties. The fuel price increase invoked strong criticism from business leaders who demanded the government to withdraw the increase immediately, as they fear the flood of high inflation would hit the entire segments of the economy, despite raising unemployment to record peak in just few months.

Local transporters in Karachi, the country's industrial and commercial hub, observed strike across the Sindh province to protest the government decision to increase the prices of petroleum products.

Muttahida Quami Movement (MQM), the third biggest party in the ruling coalition, had strongly criticized the latest price increase, raising fears it would quit again. Federal Minister for Finance Dr. Abdul Hafeez Shaikh recently announced the reversal of 50 per cent on the recent 10 per cent hike in POL product prices after hours-long negotiation with MQM leadership at Governor's House in Karachi.

The recent hike in oil prices has been withdrawn to lessen the impact on common people. The reversal of 50 per cent means after raising petrol price by 7 rupees, the government reversed the price by 3.5 rupees.

The MQM left the government in protest the last time fuel prices were raised in January and only rejoined the coalition after the hike was reversed. Though the political crisis in January apparently erupted after MQM decided to quit the government, yet the political backlash imploding against the coalition government was long over due, as it made unpopular decisions under IMF dictate that hit the already crippled poor masses.

While poor are still deprived of the basic needs of life, the ruling elite enjoy perks and privileges. They are not ready to give up their luxuries and VIP status in a country where people are committing suicides due to surge in poverty. This was the main reason that rulers succumbed to the political pressure and withdrew an unpopular fuel price rise. Ironically, the government took the popular decision only when it felt threat to its survival.

Some experts believe that inflation, which emerges from printing notes as a result of government's heavy borrowings from central bank, is equal to taxing the public, for inflation erodes peoples' real income just like the tax leaves people with lesser disposable income.

The political turmoil in the Middle East has endangered smooth supply of oil to the global markets, and pushed the price as high as $120 per barrel from $80-85 earlier. Some analysts argue that fuel price increase in Pakistan, which depends 90 per cent on imported oil, was must to avoid further deterioration of fiscal management already facing severe shortage of revenue.

BEGGAR-THY-NEIGHBOR

IMF-the country's economic lifeline-is losing patience with Pakistan People's Party (PPP)-led coalition government, which lacks the political resolve to take measures such as imposing a new sales tax to ease the fiscal deficit. The IMF beggar-thy-neighbor policies continued to deepen public frustrations with an unpopular government in the country and gradually led the economy to a stage where it is virtually living on cash injections from international lenders and donors.

The government's heavy borrowings from banking system, which has led to expansionist monetary growth, could accelerate inflation in the coming months and jeopardize government's effort to control the fiscal deficit. Pakistan agreed with the IMF that it would keep the country's fiscal deficit at 4.7 per cent for the fiscal year ending June 30. The top government officials are reportedly trying to convince IMF officials to postpone RGST enforcement until next financial year but the Fund seems to stick to its guns and is insisting that the government must deliver on the RGST front.

Moody's Investors Service recently warned that the south Asian country could face the risk of a ratings downgrade if it fails to quickly implement reforms to address a growing fiscal deficit. Moody's has warned that the country's inflation, which is rising at a faster than expected rate, brought on by increased government borrowing, could lead to a downgrade.

"A key to a (negative) change in the rating is if the fiscal deficit is more than what we expect," Reuters reported Aninda Mitra, Moody's sovereign analyst for Pakistan as saying.

The IMF $11.3 billion Stand-By-Arrangement (SBA) for Pakistan is already facing suspension from May 2010 and fifth review is also facing delay in its completion owing to non-observance of the IMF performance benchmarks.

Some analysts argue the pressure is being exerted on the present government to take most of the tough economic decisions, which cannot be politically absorbed, to discredit the ruling PPP in order to provide a stable economy to its successors.