EDITORIAL: The government's decision to reduce the prices of Motor Spirit (MS) and High Speed Diesel (HSD) must be appreciated - a decision reflecting the passing on of the reduction in international prices to domestic consumers. Petroleum and its products have a major impact on transport costs of goods and services and therefore on general price level and even though the productive and retail sectors have historically shown a penchant for promptly raising prices as and when announced by the government but a resistance to pass on a price reduction to the general consumers yet this decision would ensure that at the very least general prices would not be raised as a consequence.
The government has maintained the sales tax at 17 percent on all petroleum products however the Federal Board of Revenue (FBR) has acknowledged that the reduction in price of MS and HSD would negatively impact on total revenue collection to the tune of one billion rupees in the next 15 days alone as the amount of GST collected per litre would decline from 15.11 rupees per litre to 14.88 rupees per litre. This loss of revenue would be unsustainable for the remaining fiscal year, unless accompanied by a gain from some other source, if the staff level agreement is to be reached with the International Monetary Fund (IMF).
Covid-19 no doubt is responsible for a decline in world demand for petroleum and its products due to the lockdown resulting in a decline in international prices though given that demand always spikes up during the winter months in the West some analysts are predicting a rise in prices though with the second wave of the pandemic others are forecasting a further decline. In Pakistan too demand registered a decline of over 16 percent with projections for October 2020 at 760,818 million metric tons against actual demand of 609,875 million metric tons; however, in Pakistan's case smuggling from Iran is also held to be behind lower legal sales.
Be that as it may, a spike in demand for POL products would send a positive signal to the productive sectors that the country is ripe for re-launching productive activities that, as per the government, would be spearheaded by the construction sector as a consequence of sector specific incentives, including the amnesty scheme, since early April this year. The construction sector is largely seen as a sector with positive domestic implications in terms of raising employment opportunities and later jump-starting 50 related industrial sub-sectors.
The impact of a booming construction sector on exports, which remain dependent on demand by our international buyers subjected to a second lockdown, is expected at the earliest in the medium term. True, export orders that were delayed or cancelled during the first wave of the pandemic were recently reactivated however actual delivery is likely to be subjected to the lockdown conditions in practice in those countries.
In this context it is relevant to note that the July-September 2019 trade gap was negative 5.47 billion dollars and rose marginally to 5.5 billion dollars in the comparable period of this year with the rise attributed to a rise in imports from 11 billion dollars to 11.3 billion dollars. This is a positive development in one sense as a rise in imports of raw materials and semi- finished products reflects a rise in productive activity to fill the export orders but in another sense a widening trade deficit would have implications on the current account deficit. However, it is gratifying that the country's remittances have more than filled up the shortfall with the World Bank projecting a rise in remittances of 9 percent totaling around 24 billion dollars.
To conclude, there is evidence to suggest that the current account deficit would remain within satisfactory limits due to the rise in remittances; however, remittances are expected to decline by 2023 as per the World Bank and require mitigating measures to encourage productive activity specifically for the export sector today. Needless to add the reduction in petroleum prices effective 1 November is a step in the right direction; however, this has to be sustained to encourage GDP growth instead of continuing to support the IMF contractionary monetary and fiscal policies choking off productive activity evident to this day.
Copyright Business Recorder, 2020
Comments
Comments are closed.