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Business

January 9, 2011

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Fuel subsidy, RGST delay to increase Pakistan’s economic woes

Fuel subsidy, RGST delay to increase Pakistan’s economic woes
Apparently left with no other option, the beleaguered Pakistan Peoples’ Party (PPP) government reversed its unpopular decision of a nine percent raise in the fuel prices, but this surrender is all set to compound the country’s economic woes, including widening of budget deficit and an increased inflationary pressure.

The subsidy on fuel prices will cost a staggering 4.5 to 5.0 billion rupees a month to the national exchequer, which will widen budget deficit by another 0.2 to 0.3 percent, finance ministry officials and analysts said in background interviews.

“If we fail to shore up revenues, the subsidy on fuel will increase the budget deficit by another 0.3 percent,” said a finance ministry official requesting anonymity.

This is bad news for the country where the budget deficit is already set to hit 7.5 percent against the targeted 4.7 percent for fiscal 2010/11 (July-June) because the government has delayed implementation of the Reformed General Sales Tax (RGST).

“With this new subsidy, the deficit can even go as high as 8.0 percent in the current fiscal,” the official said.

On an average, Pakistan’s budget deficit has remained pegged to the highs of around 6.4 percent during the last three years, while its inflation has also remained in double-digits, which remain unprecedented in the country’s history.

“Even a layman can tell what ails our economy, but the irony is that there is no planning to arrest this slippage,” the official added.

Pakistan had linked its domestic oil prices to the international oil rates in 2008 in line with its plan to end untargeted subsidies and cut expenses. But the policy has taken a severe blow as the PPP-led government bowed down before the opposition and its allies, demanding a reduction in oil prices.

While the political parties and various interest groups have hailed the decision, economic experts, international donor agencies and the United States have slammed this move.

One of IMF’s Directors, Caroline Atkinson, in a briefing in Washington on Thursday said that the energy subsidies remain inefficient and untargeted. “The benefit from the energy subsidy goes to higher-income individuals and large companies.”

The United States, which is Pakistan’s biggest trading partner and donor, also criticised the decision. “We think it is a mistake to reverse the progress that was being made to provide a stronger economic base for Pakistan,” said U.S. Secretary of State Hillary Clinton.

Dr. Ashfaque Hasan Khan, director general of NUST Business School, Islamabad, and a former finance ministry advisor, said that the government has failed to increase revenues or cut expenses.

“This means that the government borrowing will surge from the State Bank of Pakistan, which will have to print more currency notes, increasing the money supply in the system,” he said. “This will have a far graver inflationary impact than the increase in oil prices. It will directly hit the common man.”

Analysts say that the government’s wavering on economic reforms, agreed with the IMF and other global lending agencies, is further eroding its credibility. This shows that rather than taking tough decisions to put the economy back on track, politics of expediency reigns supreme, they said.

Khan said that the government’s surrender on vital issues of fuel prices and RGST would hit the economy hard.

“It is a lame duck government. A lame duck government is much more damaging for the economy because it will be forced to work on the opposition agenda and give in to the blackmail of allies.”

The government had lost its majority after its key ally the Muttahida Qaumi Movement (MQM) pulled out of the coalition, protesting over the fuel price hike. The MQM is now back on treasury benches after the government reversed its decision.

“This shows that petty politics has won and the economy has been defeated,” Khan said. “It is a blow to the IMF programme as well as Pakistan’s credibility.”

Pakistan entered a 25-month $11.3 billion Stand-by Arrangement (SBA) with IMF in November 2008. The arrangement was supposed to end in January 2011, but the IMF held back the disbursement of 6th tranche worth $1.7 billion, due in August, because of government’s failure in implementing reforms. Pakistan has taken a nine-month extension to meet the IMF conditions, but analysts say implementing the tough reform programme remains easier said than done for the minority PPP government.

Sakib Sherani, an independent economist, who recently resigned from a senior position in the finance ministry, said that the government seemed to be working without an economic plan.

“By deferring RGST and withdrawing fuel price increase, the government has exposed itself to a huge fiscal pressure,” he said. “This shows that there is no thinking on part of the government. It is politics which is damaging the economy” he said. “At a time like this, more fiscal discipline and tougher decisions are needed.”

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