Increase in POL products' prices

The government yesterday increased prices of petroleum products in a range between Rs 3.53 and Rs 4.35 per litre. The revised prices will be effective from today. According to a notification issued by the Oil and Gas Regulatory Authority (Ogra) after it obtained approval from the ministries of Petroleum and Finance, the price of petrol has been increased by Rs 3.53 per litre, kerosene oil by Rs 3.79 per litre, Light Diesel Oil (LDO) by Rs 3.93 per litre, High Octane Blending Component (HOBC) Rs 4.40. The price of High Speed Diesel (HSD) has been raised by Rs 4.35 per litre.
The government believes that the increase will help yield an additional income for it. The reason behind government's decision to raise POL products' prices is not a rise in the international price of petroleum and products but two factors that are closely linked to the performance of our domestic economy. First and foremost, the continuing rupee slide vis-a-vis dollar, accounts for a steady increase in our oil import bill which is passed onto the consumers. Secondly, the oil marketing companies (OMCs) and dealers have threatened the government that they would leave the market and begin disinvesting in Pakistan until and unless their margins are significantly increased. The OMCs are demanding a rise in their margin by 1.22 rupee per litre on High Speed Diesel (HSD) and for MS 77 paisa per litre. The dealers, however, are demanding a higher rise namely of 2 rupee per litre on HSD and MS. The amount of rise was reportedly being strongly opposed by the Oil and Gas Regulatory Authority (Ogra).
A rise in the price of petroleum products would automatically have a favourable impact on the taxes collected as apart from petroleum levy (budgeted to generate 120 billion rupees in the current fiscal year, which is the same as fixed for FY2011-12) sales tax and excise duty collections imposed on petroleum and products would also rise. However, as has been patently evident a rise in the price of petroleum and products fuels inflation through its direct impact on a rise in the cost of transportation and consequently also dampens economic activity. Ogra as a regulatory body monitors the price of fuel in the country and undertakes careful analyses to determine whether the demand of various sub-sectors including OMCs and dealers is justified or not.
The contention of the OMCs and dealers is that with a dramatic rise in the cost of their inputs they can no longer operate within the previous margin. There is no doubt that the cost of living as well as the cost of doing business has increased manifold in Pakistan in recent years due to not only the eroding rupee value domestically and internationally but also due to law and order problems. Hence there is some merit in OMCs' and dealers' arguments.
The situation at present is that the government cannot politically or indeed from an economic perspective afford to take on the OMCs and dealers if they go on strike throughout the country; however at the same time the government simply cannot agree to the price rise demanded by the OMCs/dealers. A Petroleum Ministry official told Business Recorder that there is talk of undertaking a detailed study within three months to establish the basis for a revision of margins similar to an Indian study on the OMCs/dealers margins.
That must be supported as it would be a long run solution; however, its effectivity would be limited until and unless measures to reform the economy are undertaken whereby the slide in the rupee value is arrested through eliminating loadshedding, dramatically reducing domestic borrowing, increasing revenue collections through tax reforms, and reducing the budget deficit, which would reduce the cost of doing business in this country and there would be no justification for demanding a rise in margins.