An oily challenge

The federal cabinet referred the decision to raise the price of petroleum and products (POL) as proposed by Oil and Gas Regulatory Authority (Ogra) to the Economic Coordination Committee of the Cabinet (ECC) headed by Dr Hafeez Sheikh, the Advisor to the Prime Minister on Finance with the status of a full federal minister.
Multilaterals including the International Monetary Fund (IMF) have projected a growth rate of 2.8 percent for the current year, a budget deficit of around 7.2 percent of Gross Domestic Product (though independent economists place it at over 8 percent) and a current account deficit of 5.2 percent of GDP (with perhaps a roll-over of the 8.5 billion dollar one-year loan from friendly countries anticipated) in comparison to 5.7 percent last year. The reduction in the current account does not bring a comfort level to either domestic or multilateral economists as it is still at an unsustainably high level and is cited as the reason for the need for an IMF programme.
In these circumstances, not only the new finance minister had to hit the ground running but the entire cabinet must take responsibility for taking politically challenging decisions. The notification of Dr Sheikh's appointment was issued on 19 April 2019 and he was not in the country for four days out of the 12 days he has held the portfolio as he was part of the delegation accompanying Prime Minister Imran Khan to Beijing to attend the second Belt and Road Initiative forum. Eight days in office may not be enough to understand the complexities of our economy and to take an informed decision on Ogra's recommendatory POL prices. Therefore, it is extremely unfortunate that the Khan-led Cabinet passed on the buck to the ECC, a decision reminiscent of the Shahid Khaqan Abbasi-led cabinet's decision to defer the increase in POL prices effective June 2018 (as recommended by Ogra) to the caretakers by extending the then existing rates till 7 June 2018. Its rationale: to ostensibly provide relief to the people during Ramazan though analysts are agreed that the real reason was the scheduled elections on 28 July 2018. In contrast, the incumbent administration has four years and four months remaining in its tenure.
POL prices recommended by Ogra reflect not only a fluctuation in the international market price for oil and products but factored in domestic prices is the levy of two taxes on these products notably sales tax (17 percent across the board on all POL products which implies the higher the rise in the international price of oil the higher the revenue collected by the government) and petroleum levy (10 rupees on HSD, 8 rupees on petrol, 6 rupees on kerosene and 3 rupees on light diesel). In other words, Ogra's recommendations are based on (i) existing taxes levied by the government; and (ii) adjusting for the oil price fluctuations in the international market.
As prices rise in the international market the Cabinet needs to decide whether to reduce taxes (and yet sustain the revenue collected to the level of the previous month if the international oil prices have risen) thereby providing some relief to the people or to keep taxes constant and raise revenue collections thereby reducing the budget deficit.
POL prices fuel inflation as they directly impact on electricity tariffs (a major input for the industrial sector which can also negatively impact on the export sector's competitiveness as well as impact on a householder's budget) and transport costs (associated with people and goods). Thus previous governments as well as the incumbent have taken measures to reduce tax rates to provide relief to the public as POL prices have increased internationally; however a rise in the budget deficit due to lower revenue collection from POL products is also a highly inflationary policy. However, the adjustment of taxes on POL prices has an immediate impact on inflation while a rise in the budget deficit has a slower and less visible (to the general public) impact on prices. But whatever is decided the decision needs to be taken collectively by the cabinet.
Be that as it may, some government sources maintain that the decision to refer to the ECC may have been taken as the visiting IMF team's views on the matter are relevant as it may be a prior condition for the bailout package under negotiations. If this is so then the pressure on the ECC would be to notify the rates recommended by Ogra. If this is the case then one would hope that the ECC, scheduled to be held today (Thursday), would send its recommendations back to the cabinet which must exhibit the courage to stand united behind the decision on POL prices.