Soaring world oil prices fueled by the fear of a US-led war on Iraq with its widespread ramifications for the economy cannot come at a worse time for Pakistan.
It has come in a period in which the Jamali government wants to hold down prices, if it cannot reduce them, and bring relief to the masses after a prolonged period of high inflation and in the midst of widespread unemployment.
It has also come at a time when Commerce Minister Humayun Akhtar has been clamouring for reduction in power rates particularly for the industries, arguing they are among the highest in the world, discouraging industrial investment. He wants production costs to be brought down so that the country could export far more than the current target of $10 billion, and he is being strongly supported in that by trade and industry.
Following the refusal of the government to raise electricity rates by 58 paisa per unit and in fact giving a relief of 12 paisa per unit, the IMF has accused the government of violating the agreement on rule-based price-fixing for energy.
The IMF wants no subsidy for power nor subvention for WAPDA nor an increase in WAPDA’s financial deficit and accumulated liabilities, and instead demands that the rise in world oil prices be passed on to the consumers every quarter.
The problem would have been simpler if there was no persistent problem of massive power theft which in the case of the Karachi Electric Supply Corporation is as high as 40 per cent. Four years of military management of the utility has not helped to reduce the theft and loss to acceptable levels.Hence the heavy billing of the consumers who protest and pay while others go largely scot free.
And now the World Bank which has been financing the expansion of power production in Pakistan, says POL-pricing in Pakistan is non-transparent. It wants the government to establish a transparent and predictable pricing regime.
That regime should cover the taxes on POL as well and the prices should be adjusted fortnightly on the basis of a pre-set formula.
As the POL prices get adjusted every fortnight upsetting the consumers as the prices go up as in recent times we have been under the impression the World Bank is satisfied with the process. But now it appears it is not.
But if the rise or fall in world oil prices is passed on to the people as that happens the consumers may have no objection however hurtful when prices soar. But the real problem arises when there is hefty taxation on oil almost equal to the price of import price of oil plus 15 per cent sales tax which raises the prices of POL to very high levels.
Added to that is the fact what when the world prices of oil fell to under $10 a barrel two years ago the benefit of that sharp fall was not passed on to the people and they felt cheated.
The revenue from the petroleum and gas surcharge or tax this year is to be Rs. 60.5 billion of which the petroleum surcharge alone is Rs. 45 billion equal to ten per cent of the total tax revenues. The petroleum surcharge revenues last year was Rs. 39 billion while that is to be Rs. 45.5 billion this year which marks an increase in revenues of Rs 6.5 billion at a time of rising world oil prices. Normally when the world price of oil goes up the taxes within the country should fall to keep POL prices at reasonable level. Instead the government has been adding to the burden of the consumers by enhancing the taxes on oil. Earlier the IMF and the World Bank appeared to endorse this step so as to boost the revenues and reduce the budget deficit. And now when the budget deficit has come down to 4.7 per cent and certainly under five per cent from the earlier agreed 4 per cent the POL consumers should not be overtaxed in this manner.
The government has not publicly reacted to the critical notes of the IMF or the World Bank yet but may seek an accommodation with them quietly and announce it.
Meanwhile the chairman of WAPDA, Lt. Gen. Zulfikar Ali Khan, has come up with a long litany of complaints against the finance ministry to the IMF when its delegation called on him at Lahore last week. He has accused the government of not letting WAPDA enforce the 58 paisa additional charge per unit on the power it supplied to the consumers, not clearing its large dues and not providing adequate financial assistance. The finance ministry, he said, did not help WAPDA recover Rs. 32 billion from public sector institutions as compared to Rs. 20 billion in the same period last year. He says while the public sector institutions have to pay Rs. 32 billion to WAPDA it has been given only Rs. 14 billion and it was for the donors now to decide “who is defaming whom?”
It appears that the WAPDA chief wants the IMF or donors to be the arbitrators between two government departments or between the articulate WAPDA chairman and the government. The governments reaction to the sob story of the WAPDA chief to the IMF remains to be seen. Any way the situation is getting more and more complex and the sufferers are the people. The fact is high energy prices both in terms of POL and electricity, have a multiplier effect on prices as a whole. They make the cost of production higher, hamper exports and reduce domestic consumption. Consumption goes down further when there is a hefty sales tax of 15 per cent. If that tax is not being paid by many traders while they claim refunds that is just too bad. In that case the consumers are double losers.
The commerce minister has been stressing the need for cheaper energy as without that neither large new investment may come nor many of the sick industries would be revived nor exports would increase substantially.
The people are wondering why the government does not pass on at least a part of the benefit of Saudi oil grant of around a billion dollars a year, 1.3 billion dollars this year, to the people who do need some real relief beyond the token announced by the Jamali government.
As the macro-economy gets stabilised the irrational or ad hoc policies in some key sectors should be straightened out and the economy put on an even keel. Let that larger work begin now the consumers by enhancing the taxes on oil. Earlier the IMF and the World Bank appeared to endorse this step so as to boost the revenues and reduce the budget deficit. And now when the budget deficit has come down to 4.7 per cent and certainly under five per cent from the earlier agreed 4 per cent the POL consumers should not be overtaxed in this manner.
The government has not publicly reacted to the critical notes of the IMF or the World Bank yet but may seek an accommodation with them quietly and announce it.
Meanwhile the chairman of WAPDA, Lt. Gen. Zulfikar Ali Khan, has come up with a long litany of complaints against the finance ministry to the IMF when its delegation called on him at Lahore last week. He has accused the government of not letting WAPDA enforce the 58 paisa additional charge per unit on the power it supplied to the consumers, not clearing its large dues and not providing adequate financial assistance. The finance ministry, he said, did not help WAPDA recover Rs. 32 billion from public sector institutions as compared to Rs. 20 billion in the same period last year. He says while the public sector institutions have to pay Rs. 32 billion to WAPDA it has been given only Rs. 14 billion and it was for the donors now to decide “who is defaming whom?”
It appears that the WAPDA chief wants the IMF or donors to be the arbitrators between two government departments or between the articulate WAPDA chairman and the government. The governments reaction to the sob story of the WAPDA chief to the IMF remains to be seen. Any way the situation is getting more and more complex and the sufferers are the people. The fact is high energy prices both in terms of POL and electricity, have a multiplier effect on prices as a whole. They make the cost of production higher, hamper exports and reduce domestic consumption. Consumption goes down further when there is a hefty sales tax of 15 per cent. If that tax is not being paid by many traders while they claim refunds that is just too bad. In that case the consumers are double losers.
The commerce minister has been stressing the need for cheaper energy as without that neither large new investment may come nor many of the sick industries would be revived nor exports would increase substantially.
The people are wondering why the government does not pass on at least a part of the benefit of Saudi oil grant of around a billion dollars a year, 1.3 billion dollars this year, to the people who do need some real relief beyond the token announced by the Jamali government.
As the macro-economy gets stabilised the irrational or ad hoc policies in some key sectors should be straightened out and the economy put on an even keel. Let that larger work begin now.