Fuel and food prices: government should take tough decisions, abolish subsidies, says Salman

Former caretaker federal finance minister Dr Salman Shah has said the new government must take tough decisions on both fuel and food price upward adjustments by June in accordance with the international prices, which would keep the fiscal deficit at around 6 percent.
He also stressed the need for making one increase in fuel price before June to decrease subsidy on petrol and diesel, which is burdening the government due to skyrocketing increase of oil price in the international market. And after a span of 12 months upward adjustment of fuel should be carried to zero subsidy, he added.
He expressed these views while addressing a talk 'The State of Pakistan's Economy', organised by South Asian Policy Analysis Network here on Monday.
He also said this would increase inflation, thus it is imperative to provide a social safety net for the very poor section of the society. He said food support should be provide to around 7 million poor families, which would cost the government Rs 9 billion and it would be manageable if subsidies are zeroed. "Price adjustments have also been advised by the World Bank, Moodys and S&P," he added.
Dr Salman also said the unprecedented increase in the oil prices had increased our oil import bill and consequently affected the current account deficit. "To keep it at minimum level, it would be also prudent to decrease government expenditure for the time being; one way of doing it is delaying proposed public projects, which would give fiscal breathing space," he added.
He stressed again for maintaining fiscal deficit at around 6 percent, which is manageable and would not derail economic growth. He also said this would send a positive signal to the world that Pakistan is stable place to invest in and this might also improve the rating of Pakistan.
He admitted that the Planning Commission and Water and Power Ministry failed to anticipate the surge in the demand of electricity, which has created a huge energy gap in the country. He told the audience that the planners' failure was one aspect of energy deficit and not adding a single watt in the last few years by the previous government was another aspect that exacerbated the situation.
However, he was optimistic that by 2009 the energy situation would be under control, as small power generation projects, under process, would be completed in a year time and would contribute between 2800 mega watts and 3000 mega watts. "However, till then it would prudent to conserve electricity at all level to shrink the energy deficit; it has been estimated that between 20 percent and 40 percent of electricity could be saved in the industrial sector, if they apply energy conservation measures," he added.On food inflation he defended the previous government and linked the recent surge in the prices of food in the international market with the local market.
He said 45 percent of Consumer Price Index (CPI) constitutes food items; hence a slight change in the international market would have an impact on CPI. He also blamed the porous border (referring to Pak-Afghan border) for shortage of atta in the country. He said a huge amount of both wheat and atta was smuggled to Afghanistan and Central Asian States where better price was offered, which forced the previous government to import wheat at international price for meeting the local demand. "Such crisis would recur if the Pakistani borders are not tightened," he warned.
Earlier, in his presentation, he gave a rosy picture of the Pakistan economy and also linked the recent economy crisis of Pakistan with the changes in surge in the international prices of oil and food. He said the economy was on the path of growth and should continue, and Pakistan has the potential to make a significant mark in the global economy. He also said Pakistan was not the only country affected by the surge in the oil prices. "In fact, this has changed the fundamentals of most economies of the world," he added.
Dr Salman pointed out that increase dependence on gas had helped Pakistan to reduce its oil import bill, but it will be exhausting; thus in future it is essential to look for alternate gas supply through import and exploration.
He said for next one year the new government would need to ensure macro economic stability, make price adjustments and reduce subsidies, and overall Pakistan's prospect looks good.
Centre of Research in Economics and Business Director Dr Naved Hamid also spoke. He was critical of the previous government for not safeguarding the country from international financial crisis. He said if they were anticipating such crisis, then it should have slowdown rather pushing the accelerator.