Fuel subsidy: an unwanted gift?

The ongoing saga of Pakistan’s economic crisis continues to take sharp twists and turns each passing day as the looming threat of the country defaulting on its debt payments has left the masses bearing the brunt of government measures. These measures have choked economic activity and so far remained unsuccessful in controlling inflation and currency depreciation.

In one such move, the Pakistan Democratic Movement (PDM) government on Sunday decided to offer petroleum products at subsidised rates to benefit the low-income group. This decision looks more like a political move than an economic one, as Prime Minister Shehbaz Sharif announced a subsidy of Rs50 per litre as part of the petroleum relief package.

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A day later, State Minister for Energy Musadik Malik, the individual presumably leading the government initiative, said that the government may increase the subsidised amount from Rs50 to Rs100 per litre.

The amount of cross-subsidy would be generated by raising fuel prices for the rich and lowering rates for the poor, the minister said.

This move from the government was not surprising as general elections are near, and there is very little to talk about the incumbent government’s performance, especially on the economic front.

The announced package, which should have been a welcome development especially for the low-income groups ravaged by high inflation and rising unemployment in recent months, has raised several concerns as the country remains in talks with the International Monetary Fund (IMF) to revive the Extended Fund Facility (EFF).

This remains delayed to date.

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There are concerns that the announcement of the fuel subsidy, which would be submitted to the cabinet by early April, would derail talks with the international lender. The government has so far remained optimistic that the said initiative will not impact talks with the IMF.

However, these concerns are not uncalled for.

It is pertinent to mention that a similar relief package announced by the PDM predecessor, the Pakistan Tehreek-e- Insaf (PTI) government, last year under which then Prime Minister Imran Khan announced a cut in the prices of petrol and diesel, and a subsidy of Rs5 per unit in electricity rates thwarted the IMF programme.

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The incumbent government has openly condemned the PTI for these actions, which as per current finance minister Ishaq Dar “led to a serious trust deficit” between Pakistan and its partners.

This time too, the IMF has expressed its concerns after its resident representative shared that Islamabad did not consult the multilateral regarding its fuel subsidy programme.

“The IMF is seeking greater details on the scheme in terms of its operation, cost, targeting, protections against fraud and abuse, and offsetting measures, and will carefully discuss these elements with authorities,” Esther Perez Ruiz said in a message.

Therefore, the government would need to seek approval from the US-based lender and would have to convince them that the initiative would not have any fiscal impact, and would not deter Islamabad from its assigned targets.

On the other hand, the ongoing pace of talks between Pakistan and the IMF suggests that it would take some time for the lender to get on board with the government subsidy scheme.

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Moreover, how would the government implement the said package? According to details shared by the Petroleum minister, consumers with 800cc cars and above would be charged Rs50 per litre higher than the base price and that amount so charged would be diverted to subsidise those using bikes, rickshaws, and cars below 800cc.

However, the overall mechanism of the proposed government initiative remains vague and complicated. Even Musadik Malik himself conceded some shortcomings in the fuel subsidy scheme, suggesting that not a lot of homework was done by those in charge before announcing the package.

With time running out for the government, this further cements the notion that the scheme will end up as yet another political gimmick.

Still, concerns remain.

How will the government manage to develop an accurate database of customers segregating the affluent from the lower income segments?

Will it be able to bring in all stakeholders including all marketing companies and banking channels on board?

And, more importantly, how will it ensure that the scheme is not abused?

The incumbent government’s ability in the recent past to pull off measures or programmes which require high administrative skill remains questionable.

A prime example of the government’s administrative capabilities on full display are the ongoing ration distribution drives, as dozens of persons are injured and even killed almost every other day amid stampedes – a result of authorities’ mismanagement.

Such events are also a stark reminder of the country’s increasing poverty and depravation level, as human lives are unjustifiably sacrificed simply to gain a few morsels of bread.

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Lastly, even if the announced initiative is implemented as scheduled, the cross-subsidy would result in driving up the demand for petroleum products as low-income groups would have access to subsidised petroleum, which does not bode well in the current scenario as the country is facing a dollar shortage.

As per latest data, Pakistan’s foreign exchange reserves held by its central bank remain at $4.6 billion and despite recent gains, the overall number still stands at a critical level at around a month of import cover.

Therefore, the government, which has discouraged imports through the imposition of restrictions, may indirectly drive up demand for the country’s largest imported item. According to the latest data from the Pakistan Bureau of Statistics (PBS), the country imported petroleum products worth $1.264 billion in February alone.

From this perspective, the initiative could work against the government’s own current account and trade deficit targets.

It would have made more sense if the government would have focused on subsidising food items for low-income groups and, instead of developing an entirely new programme, leveraged the existing infrastructure of Ehsaas and Benazir Income Support Programme (BISP).

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