Walking a difficult talk

Understanding the rise in prices of petroleum products in the backdrop of national politics and talks with the IMF

Walking a difficult talk


fter the Pakistan Tehreek-i-Insaf-led government raised the price of petrol by Rs 64.62 per litre and of diesel oil by Rs 58.79 per litre during its three years and 8 months term, the coalition government headed by Shahbaz Sharif raised the the prices of both the petroleum products by Rs 60 per litre in just seven days. The new government had to swallow the bitter pill in a bid to revive the International Monetary Fund programme. There was a sense of urgency to avoid a default as foreign exchange reserves fell to $9.7 billion – less than needed to finance imports for six weeks.

Double digits inflation was the norm during the PTI government, mainly on account of a massive appreciation of the US dollar against the Pakistani rupee and the rising prices of petroleum products in the international market.

Imran Khan took oath as prime minister in August 2018. The price of petrol on September 1, 2018, stood at Rs 95.24 per litre and of diesel at Rs 112.94 per litre. The PTI government had raised the price of petrol by Rs 64.62 per litre to Rs 159.86 per litre till February 28, 2022. The price of diesel was raised by Rs 58.79 per litre.

The US dollar had traded at Rs 122.42 in August 2018. This rose by 52.16 percent to Rs 186.28 till April 10, 2022. This had a pivotal role in raising petroleum products’ prices in the country. The inflation rate had climbed to 13.4 percent by April 10. It had been 3.39 percent when Imran Khan took oath as prime minister in August 2018.

International experts say that crude oil prices may rise up to $140 per barrel. According to the latest working by Dr Hafeez Pasha, one of Pakistan’s most prominent economists, inflation in Pakistan may go up to 23 percent in the year 2022-23. Crude oil prices have gone up to $121 per barrel in the international market mainly on account of the ongoing Russia-Ukraine war and the EU, US sanctions on Moscow. This has resulted in an increase in demand for fuels in Europe and a massive hike in prices in the global market.

Having sensed that the opposition parties had gotten their act together and were about to oust him from the premiership through a no-trust move, Imran Khan announced a Rs 10 reduction in prices of petrol and diesel oil from March 1, and a Rs 5 per unit subsidy on electricity.

It is pertinent to mention here that the IMF strongly opposed the measures taken in violation of the terms of a $6 billion loan package.

When the government persisted in its actions, the IMF suspended its assistance programme. When the new government took over after the no-trust move, it was hesitant to raise the prices. Uncertainty prevailed for the first 46 days of the coalition government. It was only after the coalition partners took the decision to stay in power till the completion of the tenure of the National Assembly that they moved to take tough decisions.

Meanwhile, the foreign exchange reserves, that had stood at $10.8 billion on April 10 – the day the no-trust move was passed – were depleting. Once they reached $9.7 billion, placing the country at the risk of default, Moody’s, the international credit rating company downgraded Pakistan’s outlook from ‘stable’ to ‘negative’. The sovereign default risk was thus seen to have increased by 4.5 times the usual risk.

The IMF wanted Pakistan to remove the subsidy on petroleum products. The new government finally decided to do away with the subsidy, raising the prices by Rs 60 per litre in seven days. A Rs 9.32 per litre subsidy remained on petrol and a Rs 23.05 per litre subsidy on diesel oil. This means that the government still needs to raise the prices of petrol and diesel to qualify for the IMF programme even if the price of crude oil in the international market rises no further.

The raise in prices of petroleum products will impact the poor the most. The government has already announced a Rs 28 billion relief package for the provision of Rs 2,000 per month to those earning Rs 40,000 per month or less. The relief will be provided through the Benazir Income Support Programme.

The Covid-19 pandemic too had a role in aggravating inflation. During the first Covid wave, business activities across the world came to a standstill as the transportation of fuel, food products and goods was halted. However, after the second wave, many economies started gaining momentum with some safety measures in place. After some time, most carved out aggressive economic policies to cope with the losses they had sustained. This led to an increase in the petroleum products’ demand in the international market. The price of crude oil and the LNG increased. Pakistan imports more than 80 percent of the oil it uses. As oil prices went up, gas and electricity prices rose accordingly. The input cost of industrial production increased. Likewise, the transportation of goods including kitchen items also cost more, triggering an increase in the inflation.

Pakistan is an import-based economy. Whenever petroleum prices increase in the international market, prices of all products in the country are affected. Even wheat production depends on the availability of diesel oil needed to operate tube wells. The prices of construction materials, including cement and steel have also risen.

Pakistan imports edible oil worth $3 billion per annum. It should encourage sunflower farming to reduce reliance on palm oil import. Pakistan should also use more of its indigenous fuels such as Thar coal and renewable energy resources to reduce its fuel import bill for power generation.

Import-heavy economies are condemned to remain exposed to inflation whenever prices of their vital imports rise in the international market.

The writer is a senior economic correspondent of The News International

Walking a difficult talk