The government would fuel inflation and the fiscal deficit if it does not reduce expenditure to bridge the revenue shortfall as a consequence of withdrawing the petroleum price rise. Talking to Business Recorder, a former finance minister, Sartaj Aziz said that fiscal deficit as well as inflation would go up in case of government's failure to slash expenditure.
The rolling back of petroleum prices to the level of December 31, 2010 would create a monthly revenue shortfall of around Rs 5 billion, which the government has to meet by either raising revenue or reducing expenditure. He said the International Monetary Fund (IMF) may also want an alternative plan to achieve the budget deficit target agreed with it for the current fiscal year.
Aziz said that some fiscal space could be created by reducing the losses of corporations and circular debt, and warned that monetisation of fiscal deficit would worsen the inflation. He said it would be difficult to quantify the impact of inflation in either case as the dynamics of both are entirely different.
Analysts say this is the second time that the economic team has completely failed to convince the political leadership--first on implementation of the 'reformed general sales tax' (RGST), and now on passing the impact of global increase in petroleum prices in the domestic market. The economic team may now find it difficult to operate in the prevailing situation as pressure would begin to mount from donors for reforms in the economy.
Eminent economist and Senator Khurshid Ahmed said that inflationary impact of increase in petroleum prices would have been immediate and across the economy as compared to borrowing from the State Bank which would have a delayed impact and would be greater on the poor, relative to the rich. The cost of power generation would have gone up as well as price of everything else if the increase in petroleum products had not been withdrawn. He suggested that the government should plug leakages/check corruption in public sector organisations, and ensure expenditure management to make up the shortfall on this account. He also advised the government to utilise the blessings of foreign remittances for growth and productive purposes.