December 17, 2007	Monday	Zilhaj 6, 1428

WHILE the government is negotiating financial arrangements with banks for deferring a portion of an expected over Rs100 billion liability to the oil companies on oil price differential between currently frozen domestic prices and soaring international prices this fiscal year, the economic managers are also giving serious thought to tapping tax revenue potential in virtually inaccessible areas.

For the last 12 years, agriculture income is one area where tax is being collected by provincial governments half-heartedly. How can this source be exploited to its full potential is being explored.

One of the top bankers in Karachi confirmed that bankers have been approached by the State Bank to work out modalities for disbursement of funds and repayment without indicating as to how much amount is being sought by the government. Oil company executives too are in informal consultations with the government and the bankers.

On Wednesday, the Economic Co-ordination Committee of the cabinet approved a Rs18 billion syndicated loan for Shell and PSO instead of the government paying them from the national exchequer. A proposal for fortnightly adjustments to the international oil prices is also being considered by the government.

A senior official in Islamabad estimates oil prices differential touching Rs110 billion by end June next, if international oil prices stay at about $100 a barrel and domestic oil prices remain unchanged. Add to this, the surging subsidy on Wapda operations and imported wheat sales in domestic market, the fiscal deficit seems to unmanageable.

“What are the options” he asked and replied himself “push up domestic prices of oil products that, in turn, will have an all round effect on the economy’’. The second choice is to cut down on Rs500 billion public sector development programme (PSDP) and the third is to defer these liabilities for a year or two by issuing compensation bonds with the help of banks. All these are difficult political decisions for a caretaker government.

“Therefore call it a re-appropriation of budgetary resources where a mix of three possible options may be considered if something is to be done immediately” he indicated. All these possible solutions are being considered when the fiscal deficit is said to be now close to 4.9 per cent of the GDP because of oil prices differential, a slash in oil development surcharge revenue and mounting subsidies.

What is worrying the officials is that the trade deficit is showing no signs of respite, inflation is not coming under control, revenue collection has somewhat slowed down and mounting burden of expenditure is becoming alarming because of subsidies and many other expenses which the government is unable to address in an election year.

The official did confirm that caretakers are giving a hard look at the 2007-08 budget after a abnormal hike in international oil prices that has hit the government in many ways. “A re-appropriation of budgetary resources involves adjustment in both income and expenditure sides’’ he explained. While no firm and straight answers were available whether the Rs500 billion public sector development programme for the current fiscal year could come under a cut but reports from Sindh Secretariat in Karachi suggests a suspension of funds flow from Islamabad for foreign-aided projects in the province.

“There is a definite slow down of allocated funds from Islamabad which is delaying implementation of the on-going development projects’’ an official said who feared that delay in the implementation of projects will escalate costs.

While the official negotiators, bankers and oil company officials are engaged in consultations to seek a short-term solution to keep budgetary deficit within four per cent of GDP limit as provided in the Fiscal Responsibility and Debt Limitation Act 2005 (FRDL Act 2005), the ecnomic managers are working out a strategy to improve revenue generation.

“For too long, as long as 33 years, the Karachi Stock Exchange transactions are exempt from Capital Gain Tax’’ recalled a retired official in Islamabad, who had served in Finance and Economic Affairs ministries. He is convinced that which ever political party or group of parties are thrown up in January 8 elections, “there is no option for them but to go for fixing a token holding period for equity before granting it exemption from tax’’. The retired bureaucrat’s confidence on bringing stock traders under some sort of “transaction discipline” is based on his interaction with one of the top political parties’ leaders now in the election run.”

Agriculture income is another area from where the planners are exploring revenue potential. Farmers are poised to get a much better return on their products in coming years and hence the justification for improving tax collection.

But revenue generation from these two areas-— stocks and agriculture income plus real estate — may be taken up from next fiscal year and that too depends on the election results. Meanwhile, the officials in Islamabad are passing sleepless nights because of the mounting subsidy pressures. “Oil prices may remain volatile for next few years because of unpredictable political conditions in the oil producing region’’ the official said who argued that a stable and reliable source of resources is far more necessary now than ever before.

Responding to a question about any contingency plan, the official said that a strong reliable revenue base is the only guarantee to tackle unforeseen situations. For that, the government has no option but to look for the available avenues. “Re-appropriation of budgetary resources by way of cutting down on a bulging PSDP or deferring liabilities by a year or two by of compensating oil companies from bank loans are temporary and short-term measures,’’ he said.

The official also gave a detailed background of the crisis that has emerged from the recent oil prices and the lessons that government is trying to learn from it. He recalled that in the year 2001, the oil prices were being adjusted every fortnight. After averaging out international oil prices fluctuations in one fortnight, the domestic oil prices were adjusted in the following fortnight accordingly — either up or down.

Domestic oil prices are reviewed on monthly basis but according to the official, the increase does not correspond to rise in international oil prices. From May 2004 to November 30 this year, he said, the oil prices increased by 166 per cent in the international market as against which prices in domestic market were increased by only 45 per cent. Diesel prices went up by 173 per cent in the international market, but the government increased local prices by only 55 per cent. Kerosene oil showed 168 per cent rise in prices in the international market but the government made it available to local consumers at 47 per cent higher cost.

The government collected Rs6.9 billion from the levy of petroleum development surcharge during July to November 2007 while it received claims for prices differentials of Rs35 billion from the petroleum distribution companies.