Daily Times editorial March 2, 2012

Inflationary bomb

The government hit the people with a 1-2-3 punch on Wednesday by simultaneously raising oil, electricity, CNG prices, with the supposed substitute for increasingly short gas supplies, i.e. LPG, suffering its own surge because of the linkage to international prices tagged to the Aramco standard. Petrol was raised by Rs 2.75 per litre to Rs 97.66 per litre, HOBC by Rs 8.67 per litre to Rs 126.87 per litre, light diesel by Rs 3.08 per litre to Rs 93.29 per litre, kerosene by Rs 4.38 per litre to Rs 96.40 per litre, while mercifully the price of high speed diesel remained the same at Rs 103.46 per litre. CNG prices meanwhile have gone up by Rs 2.83 per kg in Zone-I (southern) and Rs 1.45 per kg in Zone-II (northern). The hoped for substitute for scarce gas, LPG, is going to be de-linked from Saudi Aramco Contract Prices in the hope of benefiting consumers and reversing the cartelisation in the sector. The price of high speed diesel was not increased because of the efforts of the National Assembly’s (NA’s) Special Committee on Petroleum Prices, which argued for avoiding the highest inflationary impact of increasing high speed diesel prices. The so-called ‘subsidy’ this entails comes to Rs 1.7 billion for the month of March. In actual fact, this is a misnomer, since it is actually the foregoing of revenue from the POL ‘cash cow’. As if this were not enough, electricity prices will go up to recover the increased price of fuel in August 2011, which had been stayed by a Lahore High Court order, since vacated. In real terms, this would translate into a 39 percent increase in consumers’ electricity bills for March.
The current policy of the government vis-à-vis energy pricing suffers from a number of defects, flaws and lacunae. First and foremost, the oil pricing mechanism is far from transparent. The NA committee’s intervention is an attempt to hold officials responsible for managing oil prices accountable. It has succeeded, albeit partially, in restraining the penchant of these officials to pass on the burden of rising oil prices in the international market wholesale onto the consumers and public. The argument is that international prices are not in our control and their increases cannot be absorbed by the government (i.e. the precarious state of finances does not allow any such ‘subsidy’). Admittedly, international prices are rising and beyond our control. Bur the other side of the coin is that successive governments (including this one) have been treating POL products as ‘cash cows’ for revenue generation and made no effort to find new sources of revenue by taxing all untaxed sectors, thus allowing some latitude to, if not completely eliminate the high tax and levies burden on POL prices, at least minimise the need for feeding off a sector whose price fluctuations have a profound and across the board effect on inflation. For one thing, every time a price hike is imminent (every fortnight), the oil companies and pumps accrue windfall profits by withholding their stocks from the market and consumers. Second, the impact of, and sympathetic price rises because of POL products’ increased prices have the very real potential to cripple an already ailing economy and crush an already groaning public. Third, in these times of economic downturn, there is little evidence that the government takes its responsibility seriously for curbing its expenditures to create some fiscal space for policies that do not place the entire burden of recessionary times on the backs of the common man. Profligacy in government spending (and bank borrowing to cover the fiscal deficit, which has the additional effect of crowding out private sector borrowing and therefore investment), unimaginative sticking to policies that lack innovative thinking and rely on received wisdom alone, and the easy expedient of passing on all the burden of inflation to industry, commerce, agriculture and the public can hardly be described as a policy framework that can deliver. It may even, in an anticipated election year, end up costing the incumbents heavily.