Everybody in the country is likely to feel the excruciating pain of a substantial increase in the prices of POL products announced by the government with effect from 1st July, 2009. According to an official announcement, price of petrol has been increased by Rs 5.92 to Rs 62.13 per litre, HOBC by Rs 8.50 to Rs 78.78 per litre, light diesel by Rs 6.94 to Rs 54.94 per litre and that of kerosene by Rs 7.48 to Rs 59.35 per litre.
Prices of aviation fuels have also been raised. The new rates are JP-1 Rs 45.82 per litre, JP-4 Rs 46.06 per litre and JP-8 Rs 48.54 per litre. The oil marketing companies (OMCs) also jacked up high speed diesel (HSD) price by Rs 6.94 to Rs 62.65 per litre. Since the HSD is a deregulated product, the Oil and Gas Regulatory Authority (OGRA) does not determine its price.
Justifying the increase in domestic oil prices, Advisor to the Prime Minister on Petroleum Dr Asim Hussain explained that this step was necessary due to substantial increase in crude prices in the international market over the past month. He also reiterated that Petroleum Development Levy (PDL) had now been replaced by a carbon surcharge to introduce transparency in the oil pricing mechanism.
The carbon surcharge will be levied at the rate of Rs 10 per litre on petrol, Rs 6 on kerosene, Rs 3 on light diesel oil, Rs 14 on HOBC and Rs 8 on HSD. In order to offer some solace to the public at large, he was quick to add that the petroleum prices were increased but gas prices were reduced for household and industrial use.
The price of gas for domestic consumers (all slabs) was reduced by 2 percent and for independent power producers, captive power and industries by 4.46 percent. However, prices for commercial consumers, CNG and cement plants has been kept unchanged.
Immediately after the announcement of increase in prices, there was some controversy regarding the approval of new prices by the Prime Minister and the Minister for Information and Broadcasting had to explain that a change in policy had been formally approved in the budget for 2009-10 under which price adjustment, from now onwards, would be automatic and need not, therefore, be referred to the top brass.
However, the authority or mode to approve or announce the adjustment in prices is not analytically important. What is crucial is the overall impact of upward adjustment in prices on the economy and on the life of people of the country, which is going to be largely negative. The increase in oil prices would further slow down industrial activity and hurt growth prospects of the economy, leading to higher level of unemployment and poverty in the country.
Along with this indirect impact, the prices of most of the commodities and services would also increase in almost direct proportion to the rise in the prices of POL products, which would make the lives of ordinary people more miserable. The problem is likely to compound further because of uncertain political situation in some oil producing countries like Nigeria and increase in the demand for oil due to revival of business activity in some developed countries.
Any further increase in international oil prices to be passed on to domestic consumers under the new pricing formula is bound to aggravate the overall socio-economic situation in the country. While it would be easy to criticise the government for introducing the new formula under which the domestic oil prices have been raised by a substantial margin, the real fault, in our view, could largely be attributed to an almost failed fiscal regime.
Pakistan's inability to raise enough revenues to meet rising expenditures from justified taxable sources has resulted in forcing the authorities to rely heavily on indirect taxes, which are convenient to collect but are generally regressive and inflationary in their character. The new plan to fix the prices of oil products in the domestic market is a classic example of such an attitude.
Obviously, if the country had enough fiscal space, there was a possibility of stabilising the domestic oil prices by providing a cushion to the impact of rise in international prices through a subsidy or reduction in the tax incidence on oil, which is very heavy at the moment.
However, the position of the public finances of the country is quite pitiable at present. Its revenue-raising capacity is dangerously limited due to low growth, falling incomes, reduced business and industrial activity and growing unchallenged power of the vested interests to evade taxes. Below 10 percent tax to GDP ratio is horrendously dismal by international standards.
Expenditure requirements, on the other hand, have increased tremendously due to the need of fighting insurgency on the western border and the rehabilitation of the IDPs. The unfortunate aspect is that the top echelons of the government and parliamentarians are insistent to have their own pound of flesh despite terrible fiscal woes of the country.
Almost at the time of the announcement of oil price increase, the members of the National Assembly were given a windfall by doubling their annual development fund to Rs 20 million each, which is generally considered as a kind of political bribe to lawmakers. This certainly appears to be in bad taste when fiscal position of the country is very unhealthy and PSDP allocations are routinely slashed to stick to the overall budget deficit agreed with multilateral financial institutions.
Anyhow, as is obvious, if the domestic oil prices cannot be insulated entirely from the sharp increase in international prices, the government needs to think about ways to reduce the heavy fiscal burden on the commodity and try to stabilise its price at a reasonable level by redoubling its efforts to raise resources from exempted and under-taxed sectors and households.
Government taxes at the level of 43 percent of per litre cost of petrol and dependence on carbon surcharge to the tune of Rs 122 billion to finance the budget appear to be too heavy and frankly inimical to the long-term interest of the country and its people.
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