News Analysis |
To the relief of the public, the government of Pakistan has decided to reduce the price of petroleum late on Friday. The Prime Minister approved the reduction in prices by up to Rs. 6/- for the month of September, according to a notification.
The price of petrol is down by Rs. 2.41 to Rs 92.83 per liter. The price of HDS or High-Speed Diesel has been reduced by Rs 6.37 per liter and now it costs Rs 106.57 liter. Similarly, the rate of kerosene oil was cut down to Rs 83.50, a decrease of 46 paisas and the price of light diesel was increased slightly by 59 paisas up to Rs 75.96 liter. These prices will be effective from 12 am, the 1st of September, Saturday.
Some Recent History
It was in this year that oil prices rose up to nearly Rs 100 per liter. They began rising soon after the former Prime Minister Nawaz Sharif was ousted. But that doesn’t mean Sharif was keeping oil prices down, as he once claimed. The price of petrol increased by Rs 2.98 in February, high-speed diesel by Rs 5.92, the price of kerosene by Rs 5.94 and light diesel oil by Rs 5.93 per liter in February of this year. When the interim government was in power, the prices of petroleum were increased incrementally up to a point where the petrol cost about Rs 100 per liter, the highest in nearly four years.
The Pakistani Tehreek-i-Insaf had criticized the Pakistan Muslim League-N government for keeping oil prices unnecessarily high for the consumer.
The Supreme Court actually took a suo notice on heavy taxes on petroleum sales. Oil prices were increased by up to Rs 14 per liter for the month of July 2018. There was a petition in the Lahore High Court as well back in July against rising petroleum prices in Pakistan which were adding to the miseries of the public. The Chief Justice of Pakistan slammed the interim government for turning petroleum into a ‘source of revenue’. The government had to reduce petroleum prices somewhat under the Supreme Court’s orders.
The fact of the matter is that the federal government doesn’t have the power to manipulate oil prices at will. Government officials who are deciding on these matters are usually faced with an array of bad options. When oil prices increased in February 2018, the ex-Prime Minister argued that this hike didn’t occur during his tenure. The actual reason for the increase was an increase in oil prices globally.
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When Petrol increased by Rs 2.98 per liter, oil prices per barrel rose to $66 in January from $56 in December of last year according to data by Nasdaq. They dropped slightly to $61 per barrel towards the end of January. Around this time, the government decided to increase prices in the country.
Similarly, when the interim government jacked up oil prices by nearly Rs 14 per liter, which was a consequence of the rupee depreciating against the dollar. The government had in fact decided to pass on the effect of the depreciation of the national currency to the consumer. One dollar was equivalent to Rs 123.50 in July, a depreciation of 3.1% in just over a month and then to Rs. 128 to a dollar.
Pakistan had been facing a balance of payment crisis for a number of years. The rupee was kept overvalued by pumping foreign currency into the market. That, however, was only a temporary solution. The foreign exchange reserves were depleting. Ultimately, the State Bank of Pakistan was no longer able to maintain an overvalued exchange rate i.e. the rate at which currencies are exchanged.
Reducing dependence on oil imports, exploiting indigenous energy generation sources where possible, reliance on renewable and alternative forms of energy are long-term measures that provide a more temporary solution to this problem.
The Pakistani Tehreek-i-Insaf had criticized the Pakistan Muslim League-N government for keeping oil prices unnecessarily high for the consumer. The new minister of Finance, Mr. Asad Umer, reportedly said the government was imposing very high taxes on the consumer and that the actual price of oil ought to be much lower in the country. The Pakistan State Oil (PSO) boasts itself as the leading public sector company in Pakistan. Its after-tax profitability in 2017 was up by 77% in FY 2017. Its profit after tax was 18,226 million rupees. In other words, when PSO earns more profit, the government earns more tax revenue, something it sorely lacks.
Government officials have to grapple with the following choice: increase oil prices to increase tax revenue from companies such as PSO or decrease oil prices to benefit the consumer (industrialists in particular) that would incentivize economic activity, thereby increasing revenues in the country overall. The former choice burdens the consumer while going in the other direction entirely reduces tax revenues. Often the government chooses a middle path and gives subsidies to industrialists while carefully managing prices for consumers in general.
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None of the above is a permanent solution, however. Decreasing oil prices may increase the sitting government’s popularity and vice versa but a long-term solution demands a complete revision of how our energy demands are met. Oil comprises the major share of the country’s import bill. Oil imports rose by nearly 35 percent year-on-year to $2.03 billion in the first two months of 2017. The share of oil in Pakistan’s total import bill in the July-Aug period in 2017 was 21 %, according to figures compiled by the Pakistan Bureau of Statistics. This puts a lot of pressure on the country’s balance of payments.
Reducing dependence on oil imports, exploiting indigenous energy generation sources where possible, reliance on renewable and alternative forms of energy are long-term measures that provide a more temporary solution to this problem. Otherwise, the government will always have to either reduce prices temporarily or increase them at times to have just about enough revenue keep muddling through.
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However, the benefits of these long-term measures don’t become readily apparent within an election cycle. Should the government take short-term measures such as reducing oil prices that increase its popularity or take measures that are good for the country in the long run but might not help politicians get re-elected? This is a choice those in power must make.