The most unkindest increases of all in petrol and diesel prices have arrived – and it is hardly news. A hike in pump prices has been a foregone conclusion for weeks. It is well known that Pakistan’s domestic fossil fuel prices are linked with global oil prices. Nor is it any secret that Brent crude prices over the last month or so have spiralled higher and higher. The government’s impotence in terms of subsidizing or absorbing the increase is also common knowledge. The caretaker government’s helplessness in the face of IMF demands is further exacerbated by the fact that Pakistan is on course to seek another, larger bailout from the global lender following the SBA. A stronger rupee could perhaps help absorb some of the shock of the international oil prices, but that does not look like an option given how slow the local currency’s appreciation has been over the last couple of weeks despite strong administrative and regulatory measures to curb hard currency demand. The fact is, the government has run out of options to bolster the rupee. We have tried administrative curbs on imports, we have done what we could with exports, we have run from pillar to post seeking foreign investment – eventually all to no avail. The upshot is that there could be no otherwise: POL prices had to go up and there was nothing anybody could do about it.
But none of the foregoing blunts the edge of inflation as felt by the common Pakistani. More expensive diesel means more expensive haulage, which in turn spikes the prices for everything from vegetables and groceries to building materials and everything in between. More expensive petrol means more expensive city transport. Farm prices will also come under pressure. And higher inflationary expectations created by this fuel price increase will give rise to price gouging, with unscrupulous traders raising prices more than warranted. This new wave of all-round inflation can potentially stoke street unrest. Consider, for instance, that the trading class has recently been on the forefront of agitation against the price hike. Now, traders are a class of people virtually immune to inflation because they simply pass all the burden on to the consumer. If anything, they stand to gain from every price hike. Also, traders are one of the most pampered classes in Pakistan, who have successfully frustrated every effort to tax their income or turnover. In essence, the government’s inability to tax the well off is why Pakistan has so little fiscal space to weather any shock, and why the common Pakistani ends up bearing the whole brunt of inflation. Although the situation is grim, it is a comedy of circumstances that the actual victim of the additional hardship – the poor Pakistani – is too busy surviving and has no time or energy left to invest in inflation protests.
The flood of inflation unleashed by this massive increase in POL prices is certain also to throw the central bank’s monetary policy off kilter. Earlier this week, the Monetary Policy Committee (MPC) saw evidence of spiking inflationary expectations but chucked it out the window, relying on the recent administrative measures to curb black market hard currency purchases to offset it. The new fuel price spike cannot fail to strengthen inflation and inflation expectations, pushing the effective interest rate into negative territory and making a mockery of the MPC decision to maintain the policy rate at 22 per cent. The question, however, is: did the MPC not see this price hike coming? In all probability, we will soon hear from the MPC again, acknowledging how its diagnosis has been overtaken by the happenstance. In any case, the central bank has allowed the menace of inflation to get ahead of the curve for now, and there is no telling when it will be able to catch up with it and bring it under control.
Perhaps the worst part is that international oil prices show no signs of ebbing in the near term. China’s domestic stimulus has pushed up international oil demand, while Saudi Arabia and Russia are spearheading a campaign to bolster oil prices by cutting production. From all appearances, we are all set to see another hike in POL prices come October 1. As well as afflicting the common citizen with increasing levels of economic hardship, this incremental inflation is sure to take its toll on economic activity, jeopardizing the marginal growth Pakistan is projecting for the current fiscal. The government will do well to take these omens to heart and think outside the box to dream up novel solutions in a pinch. While the rich among us are unlikely to feel the pinch of higher petrol prices, perhaps it is time to consider a targeted subsidy for bikers and rickshaws? Taking administrative measures to cut demand should also be considered given how spiking international oil prices are inflating our fuel import bill, which is a perpetual drain on our meagre foreign exchange cover. Should we ration motor spirit for private cars? Should car pooling be made compulsory? No option that can help us weather the brewing storm should be off the table, and the corrective measures must come soon enough to have an impact.