ECONOMIC IMPACT OF ENERGY PRICE HIKE

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

Jan 9 - 15, 20
12

Pakistani government raised the fuel prices despite a decline in international oil prices from January 1, making an addition in the New Year to the difficulties of the people already hit by double-digit inflation.

The current fuel price rise is attributed to the depreciation of rupee against the dollar in December and an increase of Rs0.66 per liter inland freight equalization margin.

On the other hand, petroleum minister Asim Hussain has warned that the whole energy system of the country could collapse, as the demand and supply gap of gas has reached 2.2 billion cubic feet (bcf). The gas in the system is 3.8 bcf while the demand has shot up to 6 bcf. Presently, the people and the industrialists are protesting against gas shortages in the country. Violent protests and skirmishes with police were recently seen in different cities including Rawalpindi and Islamabad.

The analysts believe that the increase in fuel prices is a difficult one for a beleaguered government led by increasingly unpopular President Asif Ali Zardari, as the decision is deeply unpopular that hits the poor hardest, and fraught with political risks of its own. Critics say that it has been easier for the government to raise energy prices than to boost the income tax targeting the influential rich Pakistanis or to reduce its expenditure to bridge the revenue shortfall. The government could create some fiscal space by reducing the losses of state-run corporations and circular debt instead of raising the fuel prices, which is bound to further push the prices of commodities up.

The government however kept the price of light diesel and kerosene oil unchanged after President Zardari ordered the Oil and Gas Regularity Authority (OGRA) to review its decision to increase the petroleum prices. The OGRA had earlier decided to increase the prices of most of the petroleum products. The price of petrol has been increased by Rs1.65 to Rs89.54 per litre, while the price of high octane blending component (HOBC) raised by Rs5.13 to Rs111.91 per litre.

The government faces opposition from political parties and general public against its decision to increase petroleum prices. Prime minister Yousuf Raza Gilani has been taking u-turns on fuel-price increase on the pressure of the political parties to save his fragile government from collapsing. Last January, the beleaguered Gilani caved into political pressure from the both opposition parties and coalition partners and withdrew increase in petroleum prices and restored the prices as on December 31, 2010.

The prices of major petroleum products were also increased in November. The government collects Rs10 per litre as petroleum levy on petrol, Rs4.82 on kerosene, Rs6.04 on high speed diesel (HSD) and Rs2.72 on light diesel oil (LDO).

The government is expected to collect Rs250 billion on account of GST and petroleum levy on petroleum products by June 2012. It collected Rs106 billion as GST and Rs34 billion as petroleum levy on petroleum products during the first six months (July-Dec) of the current fiscal year. The collection of GST during the same period last year stood at Rs86 billion while that of petroleum levy at Rs54 billion.

A depreciating rupee against dollar is the key reason cited for current fuel price hike. The analysts warn that repayment of International Monetary Fund (IMF) loan due early this year in the absence of further inflows could trigger panic particularly in the currency market where the dollar has appreciated by 3.5 per cent against the rupee in just one month amid worsening Pakistan-US relation. Another setback for the cash-strapped nation has come in the new year from the recent signing of a defense bill by the US President Barrack Obama. The bill freezes some $700 million in assistance to Pakistan. The rupee, which has reached Rs90 against the greenback in the open and inter-bank market, is feared to further depreciate amid Islamabad's deteriorating relationship with Washington.

The country decided to rebuff the IMF cash and ended the recent $11.3 billion loan program on September 30 with the last two tranches of over $3 billion undisbursed. The country's fragile economy had been kept afloat with IMF loan program since 2008.

The country has failed to continue talks for further loans from the IMF. As a result, it is a perception that foreign exchange reserves may start melting, mainly because of lack of funds from other lending agencies. Besides, in the wake of deteriorating Pak-US relation, the exchange rate may appear with negative outlook because there are no inflows from other sources. There are only remittances sent by overseas Pakistanis, or export proceeds.

The analysts however believe that the country's economy has been dragged to the brink where nation could not do away with loans and the government needs to scramble for more debts right now, as the country is scheduled to begin paying back the IMF loan this year.

The country's gap between external payments and receipts in November swelled to $478 million, up 66.5 percent from October, making it difficult for the country to sustain its balance of payment without assistance of international donors and lenders. The current account deficit ballooned to $2.104 billion in five months (July-November) of the current fiscal year ending June 2012 because of the swelling trade deficit and shrinking foreign exchange reserves.

The country's central bank fears that foreign currency reserves could fall to as low as $12 billion by June as current account deficit balloons to $2.1 billion over the next five months. The current account deficit will be almost double against the government claims, according to some analysts. The estimates of $6 billion decrease in foreign currency reserves are based on what are considered more realistic assumptions: that Pakistan may be able to get only one-third of the estimated Coalition Support Fund from the United States, for instance. The current account deficit may widen to $4.5 to $5 billion by the end of fiscal year 2012 worrying the central bank as it will have direct impact on forex reserves.