Pakistan - New year, new hike

The federal government has found the perfect way to wish us well in the new year, by choosing to remind us that very little actually changes when the clocks are reset on January 1. Late on Sunday (Dec 31, 2017), the government announced that petroleum product prices would be increased with effect from Monday, January 1. The price increase is significant. The new price of petrol stands at Rs81.53 per litre, up by just above Rs4 per litre. The price of diesel now stands at Rs38.91 per litre, up by almost Rs4 per litre. In an oil-dependent economy, this means that inflation is now guaranteed to increase this year. It is strange, however, that the announcement came from Adviser to the PM on Finance Miftah Ismail. Lest we forget, the country is still without a finance minister. To be fair to the government, Ogra had recommended double the price hike and the government decided to pass on half of the proposed hike. This is a measure that is not unexpected, especially given the precarious position of Pakistan’s petroleum products supply in the last few weeks.

But we must also wonder to what degree the change in petrol prices reflect the cost Pakistan will pay for agreeing to the IMF demand of devaluing the Pakistani rupee. Since oil products are primarily an imported item, any increase in dollar value compared to the rupee will show up in the price of petrol consumption inside the country. If a domestic price hike follows the increase in petrol prices, there will be little impact on Pakistan’s floundering export sector. The only impact will be to push real wages down since wages are the slowest to adjust to any changes in the price of commodities. Controlling inflation is central to making sure that the devaluation of local currency improves export. Pakistan’s petrol prices have been among some of the lowest in the region; GST on petrol has been reduced by five percent to ensure that the price remains controlled. The only problem is that the government seems to insist that the price hike has come from an increase in oil prices in the international market, not its decision to devalue the rupee. If the rupee-to-dollar ratio goes up further, then a further petrol price hike will be unavoidable – without making a dent on the country’s tax revenues. Our currency value and the international oil prices are both issues that will shape the future of oil prices in the country. This is not an optimistic start to the new year.

https://www.thenews.com.pk/print/263239-new-year-new-hike