ECONOMIC & POLITICAL COSTS OF FUEL PRICE HIKE
Feb 6 - 12, 2012
Pakistani government's decision to raise petroleum prices from February 1 is feared to fuel inflation which has come down to single digit. The decision will have both economic and political costs. The government increased petroleum prices by up to six per cent effective from this month to generate an additional revenue of Rs3 billion after raising the fuel prices in January. A depreciating rupee against dollar is the key reason cited for current fuel price hike. The government faces opposition from political parties and general public against its decision making an addition to the difficulties of the people already hit by soaring commodity prices.
The price of high speed diesel has been raised by 4.7 per cent, or Rs4.64, to Rs103.46 from Rs98.82 per litre, petrol (motor spirit) by six per cent, or Rs5.37, to Rs94.91 from Rs89.54 per litre, kerosene by 3.11 per cent, or Rs2.78, to Rs92.02 from Rs89.24 per litre and light diesel by four per cent, or Rs3.43, to Rs90.21 from Rs86.78 per litre. Prices of JP-1 and JP-8 (aviation fuels) were raised by 1.5 per cent and 3.3 per cent to Rs83.43 and Rs83.13 per litre respectively. The highest increase of 5.62 per cent, or Rs6.29 per litre, was made in the prices of high octane blending component (HOBC) to Rs118.20 from Rs111.91 per litre.
The consumer price index (CPI) inflation fell a 13-month low to 9.75 per cent in December from 10.2 per cent in November 2011, as the energy crisis damped economic growth, according to the Federal Bureau of Statistics (FBS). The core inflation, excluding food and energy, slightly dropped to 10.1 per cent in December from 10.4 per cent in November. Single-digit inflation provides the central bank a cushion to slash its benchmark interest rate, which is still in double digits, in its next monetary policy to spur economic growth.
Legislators belonging to different political parties demanded immediate withdrawal of the recent fuel price hike which would have serious repercussions for the people and the economy. They staged a walkout from the Senate against a massive increase in the prices of petroleum products and natural gas. The officials say that the ogra took the decision keeping in view the fluctuation in dollar-rupee parity and an increase in the international prices of petroleum products.
Muttahida Qaumi Movement (MQM), the second largest ally in the Pakistan People's Party-led coalition government staged a token walkout to protest against up to six per cent overnight increases in the prices of petroleum products at the start of the new session of the house. Prime Minister Yousaf 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 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, particularly in election year.
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 Oil and Gas Regulatory Authority (Ogra) had reportedly recommended to freeze oil prices, as government receipts from petroleum levy and sales stood at Rs153.3 billion against Rs144.1 billion during the same period of last year.
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.
The central bank in its first quarterly report said that reduction in the budget deficit was caused primarily by 29.7 percent growth in FBR revenues, on the back of increased tax collection efforts and higher revenues from imports. The collections under direct tax and sales tax, which together make 81.4 percent of the total FBR revenue, grew by 30.1 and 38.6 percent, respectively. The central bank however warned that FBR's annual tax collection target of Rs 1,952.3 billion for current fiscal year would mean an additional Rs 394.3 billion over last year's tax collection. The FBR would have to make serious efforts to achieve the end-year target, as it collected of Rs 840.1 billion in taxes on the end of December 2011.
The achievement of the revenue target for the last fiscal year was a core demand of the International Monetary Fund (IMF) for reviving the suspended $11.3 billion programme the country ended incomplete on September 30. The shortfall in revenue collection led to further deterioration on the fiscal side and triggered the fiscal deficit to 6.6 per cent of GDP in the last fiscal year.
The government borrowing from financial system to meet the budgetary expenditures has increased by 136 percent to Rs813.79 billion up to January 20 against Rs344.58 billion a year ago, according to the State Bank of Pakistan (SBP). Despite an agreement with the central bank the government borrowed Rs185.89 billion during the period against Rs123 billion, showing a growth of 50.36 percent. The government borrowing from scheduled banks increased to Rs627.89 billion from Rs220.94 billion, showing a growth of 184 percent.
The country's fiscal deficit swelled to 2.6 per cent of gross domestic product (GDP) in the first half (July-December) of the current fiscal year 2011-12 ending June, against a deficit of 2.9 per cent of GDP in the same period the previous year. The trade deficit widened to $11.5 billion in the first half, against $8.287 billion recorded in the same period a year ago.