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A critical perspective on recent hike in fuel prices – by Ahmed Iqbalabadi

OGRA announced an increase in petroleum products on 31st October. The  increase is for sure going to fuel inflation, something which the whole nation has to endure, however, it is important to realize that why petroleum prices are to be raised. Off course, I need to be incensed at the increase as no one in this world is happy with increase in prices of any commodity. The trickledown effect of fuel price increase is also substantial as transport becomes costly, so does power generation and so does input prices of everything that we consume.

Our media has rightly  refocused its attentions on the matter of mehngai which it has chosen to ignore for mindless issues like NRO, 18th Amendment and Judges Appointment/Restoration/Removal. Not many times do we see focus on inflation or economy. The recent increase in fuel prices has been condemned by all and sundry. I have some points which need pondering from our side:

  1. Petroleum prices were not increased from end of 2006 till March 2008. During that time international oil prices fluctuated causing stress oil importing companies while the government kept on subsidizing the difference between price paid for the product and price received from the consumer. Result was circular debt that kept on ballooning
  2. As the circular debt kept on mounting, electricity prices were not raised. Off course, if the cost of production is higher than price charged, you will see losses ballooning. Also cash flow is affected which causes circular debt to go on increasing
  3. After the petroleum product prices were increased from March 2008 onwards, they  touched an all time high of Rs 86.66 per liter between July and September 2008. When the international oil prices came down, the same prices were brought down to as low as Rs. 56 in March 2009.
  4. In August 2010, International oil prices were hovering around USD 72.5 per barrel which are now at USD 82 or so. We can see an increase of nearly 13%. If oil prices go down from here, we should expect Ogra to reduce the prices of products locally.

 

Tough Decisions:

As PM, Shaukat Aziz chose to act as an Ostrich

We can choose to remain in denial that prices should be low at all times irrespective of where the product prices are internationally or we can choose to realize that we are living in a world where product prices are no more under the control of governments. When the PPP government took over, the Circular Debt was above Rs. 300 billion in 2008 which has now come down to less than Rs. 200 billion.

Right now the decision would be: to keep on with lower prices and give “some relief” to the “aam aadmi” but at the same time keep on borrowing from State Bank or international agencies to service the difference between the price paid and price charged and thereby increasing the circular debt OR move the prices as per the market prices and stop the ballooning of circular debt.

Off course, it is a tough choice to make. I can choose to do the “Ostrich Algorithm” something which Shaukat Aziz chose to do i.e. Insert his head in the sand as a storm brewed or take a tough decision and reduce my losses. What Shaukat Aziz did by not increasing the prices is something the current government is suffering from i.e. the circular debt.

Choosing not to increase prices is an easy decision but has implications in the long run. One can choose to be selfish by trying to remain popular (something which PML-Q/Pervez Musharraf tried doing) but then temporary relief is always followed by bigger problems. In essence, PML-N or the opposition should be happy that by increasing the prices, the government gets unpopular while at the same time by reducing the circular debt it is them who are  going to benefit if they form a government, ever, that is!!

About the author

Ahmed Iqbalabadi

7 Comments

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  • Lets call a spade a spade. While the government may have reasons, it has been in power for two and a half years now and any relief is nowhere in site. So even though I know the whole cycle of economy specifically the lagging factors, there is immense inaction of the part of the government.

    With such a huge cabinet you expect them to multitask which is clearly not happening. I guess we should skim through the net and find a balanced but highly critical article and post it here.

    For the record, even Democrats are set to lose Congress due to Obama’s lack of initiative, so why not call spade a spade ourselves.

  • I tend to agree with Saad in this. The PPP government has not an enviable record in governance and administration. Their promises of roti, kapra, makan and taleem remain far from fulfilled.

  • Saad and Abdul,
    both of you are educated people who know what is the impact of subsidies. Subsidies are good when the state has sufficient resources available. I have given my thoughts, you guys present a better and alternate solution.
    This decision is in no way a popular decision. You have two choices: take loans from state bank which increases debt and also inflation or move prices as per market forces. If oil prices come down, local prices should and would come down.
    There are multi pronged challenges facing not just the government but everyone in the nation.

  • that’s really not the point,,

    just compare the governments performance in terrorism versus the economy, the impact subsidiaries, relentless privatization, freezing of loans had on economy is similar to creating madrassas and funding them, supporting Taliban and letting them takeover Swaat and infact Islamabad as well. But on terrorism the government has taken direct intervention and even though there are still frequent attacks people still recognize the efforts of the government on the matter.

    The government was well aware of the circular debt, loan situation, fiscal space etc when it got into power and its over 30 months so there should be some relief. For the common man. The fuel prices went as up as 86 but the problem is that government did not intervene to bring transport prices down when fuel prices reverted and now they are set to go up again. Plus there are plenty of steps like removing pillion riding ban etc to ease the problem of the man on the street but no such steps seem to be on the cards.

  • @Saad,
    We are mixing topics. I cent percent agree with you on controlling transport fares. I feel that a person can eat one less roti or even skip one meal, but needs to commute to his or her place of work. Can you identify some solutions? A friend of ours had presented a solution (amongst many possible solutions) for countering inflation. You can read it here: http://tribune.com.pk/story/39678/countering-inflation-by-monitoring-input-prices/

    Pillion riding should be allowed, that is a mindless bureaucratic solution for any terrorist activity.

    On the matter of Circular Debt, I can assure you that even the Ministry of Finance officials didnt know the full circular debt matter till end of 2008!!!! Politicians to hayn hee incompetent, the bureaucrats are nincumpoops of the highest order. FYI, the circular debt is now down to Rs 185 bn. It has to come down and god willing, it will.

  • Price hike
    From the Newspaper
    Yesterday
    A SHARP spike in petroleum prices — petrol, diesel and kerosene will be dearer by between six to nine per cent — has been approved by the Oil and Gas Regulatory Authority. The move will have a deleterious effect on industrial production and drive up inflation, which has remained high in recent years. While it appears the move is in line with the increase in international oil prices, the oil-pricing mechanism in use in Pakistan passes on disproportionate increases to consumers. The blame for this must lie with the government, which in the summer pledged to deregulate the price of petroleum products. It has not moved quickly enough to have the requisite legislation vetted by the concerned ministries and presented in parliament. (An Ogra amendment bill is necessary for the de-regulated environment to allow the authority to make certain desirable interventions when the market-based pricing mechanism proves inadequate.) It is a familiar tale of legislative procrastination that debunks all the rhetoric about interest in people`s welfare.

    The measures mooted in the summer included deregulating the price of petroleum, doing away with the `deemed duty` given to oil refineries and abolishing the Inland Freight Equalisation Margin. Presently, under the regulated price mechanism, oil-marketing companies and dealers earn a commission on the sale of petroleum products which is calculated as a percentage of the price of those products. There is no apparent justification for this — regardless of whether petrol costs Rs10 or Rs100, the cost to an OMC or a dealer to physically deliver the product to a consumer ought to remain the same. But windfalls profits have clearly been earned over the last decade. Deregulation would eliminate that problem. Similarly, the deemed duty paid to oil refineries was meant as a special, time-limited measure to help the refineries expand and upgrade their facilities so as to meet European standards and to reduce the sulphur content in petroleum products. But eight years into the deemed duty regime, the refineries continue to claim the money on the grounds that they need it for financial survival, ignoring the original, quality-oriented purpose of the duty. If the government had acted quicker on the legislative front, such a sharp increase in petroleum prices may well have been avoided.

    There is also the question of taxation. Approximately four out of every 10 rupees spent on petroleum products are pocketed by the government in the form of indirect taxes. Lacking the political will to collect more direct taxes, the government continues to rely on a highly regressive tax system. Notwithstanding the government`s claims, poor governance has a direct impact on petroleum prices.

    Dawn, Editorial, 2 Nov 2010

  • Guys, oil prices will go up further next month if international prices keep on going up. The likelihood is high as currently oil trades at $84.5 a barrel. With winter season coming up, expect it to go north!