Subsidising Oil — Poor Govt’s Poor Choice

By Amir Zia
The News
Sunday, March 6, 2011

Untargeted subsidies remain a bane for the economy as in the case of petroleum products. Instead, the government should plan targeted subsidies for low-income groups.

The Pakistan Peoples’ Party (PPP) government has again been forced to beat a hasty retreat on the thorny issue of adjusting domestic fuel prices in line with the international oil rates. However, unlike early January, when the government was compelled to withdraw the entire nine percent hike, this time around it is not an all-out surrender, but a partial one. The revised decision to slash by 50 percent a 9.9 percent increase in fuel prices within three days of its March 1 announcement has been made to appease a key coalition partner, the Muttahida Qaumi Movement (MQM), and to deflect the political pressure.

This concession definitely has made the life of the embattled PPP government slightly easy for a month or so, but the issue remains far from over and its repercussions are all set to bite the economy hard in the coming days in terms of a widening budget deficit and mounting inflationary pressure.

The tidings are indeed ominous.

There has been an almost 26 percent raise in the world oil prices since November 1 to date, a period during which Pakistan kept its domestic fuel rates capped. The international oil market remains highly volatile and nervous because of the Libyan crisis, which has squeezed supplies from this North African nation. As the crisis drags on, the crude prices appear set to remain on the higher side despite assurances by some key oil producing countries to increase their output. For countries such as Pakistan, this means bleaker and more uncertain times.

A fleeting glance at the damage done due to the game of politicking on this crucial economic issue explains it all. The government had already taken a hit of around 14 to 15 billion rupees from November 1 to end-February for keeping the oil prices unchanged. This loss is likely to mount to 20 billion rupees now because the government is being forced to sell fuel at a discount of more than 20 percent.

Whether we call it subsidy or slashing the government levy on the petroleum products, the end result is the ballooning of the budget deficit, which is all set to cross eight percent against the original target of 4.7 percent for the current fiscal 2010/11 (July-June) as all efforts to expand the tax base through the imposition of reformed general sales tax (RGST) and meaningfully cut expenses appear to be making no headway.

The government, which had set a target to collect 110 billion rupees through the petroleum levy during the current fiscal year, faces an accumulative shortfall of at least 20 billion rupees in achieving this target by the end of March because of selling oil cheaper than international prices. If the government continues to subsidise oil, this shortfall is all set to increase. According to a senior Finance Ministry official, the government has no arrangement to recoup this amount.

There are serious repercussions if the government continues to waiver on such key policy issues, starting not just from a galloping budget deficit — termed the mother of all troubles for an economy -ñ but further undermining Pakistan’s credibility in the eyes of the global donor agencies, including the International Monetary Fund (IMF) and the international community. The cash-strapped government, which had already increased the country’s public debt to a record 10 trillion rupees from 4.8 trillion rupees in 2006/07, will have to depend on ever-increased bank borrowing and print more and more new notes, triggering an unprecedented inflationary pressure, which is already hovering at more than 16 percent.

A further increase in inflation because of the fundamental policy flaws will hit the poorest of the poor and prove more damaging for the economy than the price hike triggered by an increase in petroleum prices, which may appear bitter, but at least remains a step in the right direction.

However, the way the government has been yielding to the pressure of allies, opposition and interest groups, mainly led by public transporters who staged a two-day strike in Karachi against petroleum price increase earlier this week, underlines the fact that it has no vision or any commitment to tough economic reforms, which remain vital for the country.

The government’s economic team despite identifying the ills gripping the economy and prescribing solutions, has proved powerless to implement them. Our soft spoken Finance Minister Dr Abdul Hafeez Sheikh has been unable to make his voice heard or put reason in the minds of his political bosses. He and his economic team have also been unable to effectively fight the government’s economic case and point-of-view on crucial issues effectively in the media. The result is that the government seems to be rudderless when it comes to economic management. The politics of appeasement and surrender are only deepening the crisis rather than offering a way forward.

The role of key government allies and the opposition also remains negative and destructive. They appear to be more focused on playing to the gallery by design or default and have become a key obstruction in the process of reforms. Most of their suggestions remain either devoid of reality or offer long-term solutions — from eradicating corruption in government ministries and departments, including the Federal Board of Revenue to the restructuring of loss-making state-run institutions, which need around 300 billion rupees annual subsidies.

Yes, progress need to be made on these fronts, as well, but it is a harsh reality that these forces not only remain unable to come up with doable suggestions for increasing the country’s revenue base, but block reforms despite all their lip-service paid to this cause. A case to point is the way the political parties contributed in obstructing reforms in the privately-run Karachi Electric Supply Company and the state-run Pakistan International Airlines. There is a need for a national consensus on key economic issues, including increasing the revenue base, curtailing expenses, fighting corruption and re-launching the country’s stalled privatisation programme. Along with this, those issues, which had been settled long ago, such as linking domestic oil rates with the international market ñ should not be reopened.

Untargeted subsidies remain a bane for the economy as in the case of petroleum products. Instead, the government and the main political players should plan targeted subsidies for low-income groups. The politics around oil prices is one thing, which Pakistan’s economy cannot afford now.