Forecast of gloomy days

Speaking before the Senate Standing Committee on Finance and Revenue, Finance Minister Ishaq Dar was utterly forthright and to the point. He felt no hesitation in saying that there would be more increases in the prices of petroleum products before the next budget. "Get ready for higher fuel prices in the coming days.
The government may not be able to continue subsidies in view of higher international prices and other factors". Matters had become complicated because of previous government's inability to pass on the increase in international oil prices to end-users at home and allocate a separate amount in the budget to cater to the increase. Only Rs 15 billion were kept for oil subsidy in the budget but it had already climbed to Rs 135 billion by March and might cross Rs 153 billion by the end of this fiscal year.
That is the reason that "we have been pushed into a tight corner. The situation is so grim that the government is providing subsidies of as much as Rs 17-18 per litre, but it cannot go on". As the former government had also incurred excess expenditures, it had created additional financial constraints for the present government.
Ishaq Dar also hinted at drastic cuts in the ADP and PSDP in the coming budget because of heavy subsidies and asserted that it was a big challenge for the new government to meet the claims of oil companies and Wapda when the government had already borrowed Rs 400 billion from the central bank as against a much lower target. Pakistan was likely to borrow three billion dollars from multilateral sources for budgetary support and to maintain foreign exchange reserves at a reasonable level which were expected to go down to 10 billion dollars by year-end due to the increasing oil and wheat import bill.
We feel that Dar has done a service to the nation by telling the truth and elaborating the policy thrust of the present government. This will prepare the people for the difficult days ahead. Most of the oil importing countries are in similar conditions but they were better able to deal with the problem by adjusting the domestic prices of oil in line with the trends in the international market in time and without much qualms, thinking that it was a kind of bolt from the blue which was, of course, very painful but had to be endured.
Delay in making such adjustments and consequently piling of circular debt in Pakistan have made matters so difficult now that the present government has no alternative but to increase the domestic oil prices in quick succession to clear the backlog as well as to accommodate the current impact of continuously rising price of oil in the international market.
Three upward revisions in fuel prices over the past six weeks have pushed the petrol price to Rs 66.03 per litre from Rs 53.70, diesel to Rs 47.28 per litre from Rs 38, and kerosene oil to Rs 49.02 per litre from Rs 35.23. Rising oil prices have pushed the inflation rate to an all-time high of over 14 percent in March, 2008, with food inflation hovering around 20 percent. Notable is the fact that inflation rate in March did not capture the full impact of the recent increase in oil prices.
Obviously, inflation rate is expected to increase by leaps and bounds in the coming months after the effect of high international prices is passed on to the domestic market as stated by the Finance Minister. Rise of such a high magnitude in the price level is certainly going to have a devastating impact on the lives of ordinary people of the country. Any cut in ADB or PSDP as mentioned by Dar would further complicate an already adverse situation.
While all of this appears to be unavoidable, its negative implications could be softened to an extent by taking certain measures on the fiscal side. Agreed that it would be better to revert to strict financial discipline as early as possible, but the objective could partly be achieved by mobilising higher level of revenues from other sources and cutting expenditures on low priority projects and items.
In fact, the amount of expenditure under all the heads of accounts needs to be vetted and re-examined with a view to judging its indispensability under such exceptional circumstances. A greater fiscal effort in other areas could lessen the need of the country to raise the prices of petroleum products for budgetary reasons. Borrowing of three billion dollars from multilateral sources as indicated by the Finance Minister would increase the country's external indebtedness further. Pakistan must try to live within its own means and reduce its current account deficit to sustainable levels as early as possible.