The crippling mix

Last week, Secretary Finance Dr Waqar Masood Khan made supposedly very 'encouraging' disclosures before the Senate's Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatisation about the economy's performance during the first half of FY15. But not all his disclosures were believable; for instance, a 2 percent drop in inflation...
Similarly, his claim that, compared to FY14, drop in exports contracted to 2 percent in second quarter compared to 5 percent in the first, was overoptimistic, but the claim about oil import bill dropping to $3 billion against $5 billion in the first quarter, was significant because as he spoke, severe shortage of petroleum products fuelled a crisis in the Punjab.
Beginning January 12, it was visible that supply of petroleum products was becoming scarce in the Punjab. Later, there were reports of black marketing of these products and, by the weekend, petrol stations (mostly PSO's) were shutting down thereby freezing even essential services such as Edhi's ambulance service, and attendance in offices was falling.
Closure of the CNG stations due to shortage of gas supply made things worse in the Punjab, while in other provinces the situation was "normal". Impliedly, CNG stations there too closing regularly, but as per pre-announced schedule. In today's Pakistan, normalcy implies getting used to routine shortage of the essentials, especially electricity and fuel.
During his above-referred presentation before the Senate, the Secretary Finance was asked to explain the circumstances leading to the current crippling shortage of petroleum products. In response, he stated that disruption in the supply chain caused this chaos, and that till end-February, supply of petroleum products will remain constrained.
The fact is that the supply mess was triggered by illiquidity of PSO that prevented it from importing oil while, since November, other oil marketing companies - accused by the government for not importing enough oil - kept importing increased volumes of oil. The question is "was this blame voiced despite watching the ongoing oil import trend?"
According to the Chairman OGRA, in 2014, demand for petroleum products increased by 25 percent due to significant drops in fuel prices and CNG-driven vehicles switching over to petrol, but avoided blaming gas loadshedding that forced the use of petroleum products for heating, although their prices are still too high for the ordinary to switchover to them.
The real cause of shortage of petroleum products was the huge indebtedness of PSO (Rs 284 billion) because furnace oil consuming IPPs weren't paying their dues to PSO and the major reason there for was non-payment of electricity bills by government offices and agencies - consequence of the strategy to cut fiscal deficit in a make-believe fashion.
The other cause was inadequate oil import, courtesy the lure of profiting from falling oil prices - a trend that wasn't checked by Ogra although terms of licences of the oil marketing companies (OMCs) require them to always maintain stocks sufficient for 20-day consumption, although the developing price scenario called for close watch, not issuing post facto show-cause notices to oil marketing companies.
According to its Chairman, OGRA will now open branch offices in all provincial capitals to oversee the functioning of the oil sector, and according to the Secretary Finance, PSO had been provided funds to establish not one but 'five' Letters of Credit for urgent import of oil, and that too on Saturday January 17 (weekly bank holiday). Some emergency, isn't it?
This crisis prompted several questions: did the oil import bill decline because of the fall in oil price, or because not enough oil was imported due to casual oversight of oil marketing companies by the Ministry of Petroleum, or was it because the Finance Minister sidelined Ministry of Petroleum's demands for paying the IPPs (ie bulk of the circular debt) to repay PSO's debt?
The Prime Minister's punitive action against top brass of the petroleum sector can't pass the blame on to the Ministry of Petroleum because we know that the Finance Minister has the Prime Minister's backing, and the emergency funding of PSO suggests that Ministry of Petroleum's demand to that effect was earlier ignored by the Ministry of Finance.
But petroleum ministry too can't escape blame on one count. The way suppliers benefit from LPG pricing, is no secret. The Lahore High Court barred OGRA from fixing LPG price because OGRA didn't pursue its case convincingly. Only now has the petroleum ministry sent a summary to the Council of Common Interest to seek authority for fixing LPG price.
Why do we act so late, in fact, only after it cripples the whole economy? Is this how the government hopes to popularise itself in a setting that is threatening it in many ways beginning with the challenge to validity of its coming into power, to questioning its integrity in raising resources through indirect taxes and then squandering the tax revenue?
The 5 percent rise in GST in petroleum products' prices has been criticised widely because it reduces the benefit of falling oil prices to the masses, and the Gas Infrastructure Development Cess (extended for 120 days by a bare minimum parliamentary majority) is questioned because Pakistan hasn't yet laid a pipeline to receive the badly-needed natural gas supply from Iran.
Because our 'national politics' prevented building of dams, Pakistan's reliance on oil-fired power generation went up. But after oil price fell by over 50 percent since June 2014, people expected a significant drop in power tariffs. However, these tariffs are headed for another hike because the subsidy therein must be withdrawn to fulfil IMF's terms of continued lending.
Indeed, subsidies must be minimised, but surely they didn't constitute 50 percent of the power tariff. With oil price down by over 50 percent, and likely to fall further, why is the government again hiking up power tariffs? The likely reasons there for are the unchecked distortions in IPPs' reported power generation costs, and government's quest for cutting the fiscal deficit.
IPPs' inability to operate at full capacity due to high furnace oil price was the reason cited for loadshedding. But, despite a huge drop in oil price, why hasn't loadshedding gone down? Can't the IPPs produce more electricity? Why is Karachi (contributing over 60 percent of the federal tax revenue) being threatened with possible cut off of 650MW supply from the national grid?
What cripples the economy is a mix of inadequate tax collection and self-serving uses of the tax revenue (eg building motorways) and its waste. This prevents removal of distortions in the petroleum, gas and power sectors that continue to cripple the economy. As long as this mix isn't undone, economic crises - undeniable proof of flawed governance - will continue.