Increase in petroleum prices

At long last, the government had to come to terms with the inevitable. After dithering for a protracted period, it finally decided to announce price increases of varying degrees in the domestic petroleum products with effect from 1st March, 2008 in response to the continuous rise in the international prices of oil which are now hovering at over dollar 100 per barrel.
According to a notification issued by Oil and Gas Regulatory Authority (Ogra), the price of petrol (motor spirit) has been increased by 9.31 percent to Rs 58.70 per litre from Rs 53.70 per litre, High Octane Blending Component by 7.7 percent to Rs 69.88 per litre from Rs 64.88 per litre, kerosene oil by 9.93 percent to Rs 38.73 per litre from Rs 35.23 per litre and Light Diesel Oil by 10.7 percent to Rs 36.07 per litre from Rs 32.57 per litre.
According to a government spokesman, the oil prices in the international market had showed a record surge during the last several months which had compelled the authorities to pass on partial increase to consumers. Nonetheless, even after the price increase, the government will continue to provide a subsidy of Rs 16.82 per litre on kerosene oil and Rs 15.30 per litre on light diesel oil.
Power tariff was also raised by nine percent for consumers of eight power distribution companies. However, the lifeline electric power consumers, using upto 50 units per month, were exempted from hike in power tariff.
Explaining the rationale of the increase in oil prices and power tariff at a press conference, Caretaker Finance Minister Salman Shah asserted that the decision was taken to reduce the level of subsidies and reduce the haemorrhage on the budget.
He even went on to warn the consumers and general public that "the current hike in the oil prices will not be enough to wipe out the subsidy that the government is bearing on local sale of petroleum products. The next government will have to make two or three adjustments in 12 - 18 months to eliminate the subsidy." It was also revealed that the increase now announced would have an additional 1.5 percent impact on inflation.
Claim was also made that the caretaker government had taken the majority party into confidence before increasing oil prices and power tariff. However, such a claim was denied by PPP spokesman Farhatullah Babar in an interview with a newspaper later on.
The argument in favour of a substantial increase in domestic oil prices and upward adjustment in power tariff can hardly be disputed. In fact, it was long overdue and in an editorial entitled "The case for a rise in POL prices" on 10th December, 2007, we had pleaded for such a step for budgetary reasons.
Although Shaukat Aziz government was committed to passing on the impact of rise in international prices to the domestic market under its reform agenda, yet it shied away from doing the needful for a considerably long period due to political expediency.
The last adjustment was made on 16th January, 2007 and since then local prices were kept unchanged despite the fact that international market had witnessed an unprecedented increase in the prices of crude oil, diesel and kerosene oil, forcing the government to extend much higher level of subsidies than the original estimates for the Federal Budget FY08 which were reported to have been based on the international oil price of dollar 69 per barrel.
Power tariffs were also not raised according to the requirements of the situation which resulted in default on payments by several companies, rise in inter-corporate circular debt and claims for higher level of subsidies from the budget. Of course, the prevailing situation was not at all sustainable and the fiscal position could have come under tremendous pressure in the absence of a substantial upward adjustment in domestic oil prices.
As a matter of fact, even after the present increase in domestic oil prices, the fiscal position of the country would have to be improved by increasing the prices further if international prices of oil do not show a substantial decline in the next few months.
Despite its inevitability, however, the development will be shocking for the oil consumers and public at large because there will be an increase in the price of everything, ranging from transport to food and to any other item that has to be bought and sold in the market. Contrary to the assertion of Salman Shah, the price impact could be greater than 1.5 percent which could render the lives of ordinary people much more miserable.
The international competitiveness of the country would also come under strain due to higher domestic cost of production and this will have implications for employment and poverty as well as current account of the economy.
However, while recognising the necessity for an upward adjustment in prices, one could easily disagree with the timing of the move. Despite their avowed commitment, both Shaukat Aziz as well as the present Caretaker Government in which Salman Shah held very responsible positions kept on delaying the unavoidable decision probably to benefit the PML (Q) in the coming elections.
This was possible due to the fact that fiscal indiscipline usually results in higher inflation with a time lag. Had the POL prices been raised in stages in response to the increase in the international oil prices, the rate of increase in oil prices would have been gradual and probably less upsetting and painful.
The wisdom of passing the load on to the people in an accumulated form and throwing the inevitable legacy of the past to the next government is obviously flawed and based purely on political considerations. The unpleasant decision to raise the prices of POL also highlights the policy limitations and weakness of fiscal strategy of the country.
The domestic oil prices could have been maintained at a lower level if the country was not required to impose GST and other levies on POL products for budgetary considerations. We obviously need to mobilise higher level of revenues from untaxed and exempted sectors and check the rampant evasion of taxes for the sake of equity and curtail non-development expenditures to the minimum in order to avoid indirect taxes on items like POL products and at the same achieve the targets as prescribed under the FRDL Act, 2005.
The problems in the energy sector and the need to hike the power tariff could also be largely alleviated by reducing system losses of power utilities, checking of theft, expediting efforts for collection of bills and proper management of hydropower potential of the country. In short, unprecedented increase in the international oil prices is a timely reminder that we need to put our house in order to partially neutralise its negative impact on the economy and the people of this country.