Published On: Wed, Feb 14th, 2018

High oil prices and Opposition

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After almost an entire year in which petrol prices have gone up without much notice, it seems the opposition has just woken to the latest price hike – terming the Rs2.98 increase in petroleum prices the ‘petrol bomb’. The increase itself is a significant one but it is hard to see what else could be done under the current fiscal framework in the country. Petroleum goods remain heavily taxed to make up a significant chunk of the revenue collected by the government. This framework remains dependent on the international price of oil, which has been on the rise. One must wonder whether the opposition parties are offering an alternative setup in which petrol is subsidised for the consumer? In itself, the revenue available to the Pakistani state can be better spent elsewhere as long as petrol prices can be kept within a reasonable spectrum. Any hike in such an essential commodity as petroleum is likely to be seen as cruel and uncalled for. This line has been toed by business leaders who are right to be fearful of the impact of rising petrol prices on their ability to compete in the domestic and international market.

This is where the government faces a complex decision. High oil prices mean that Pakistan’s export competitiveness goes down. With exports already falling, this is something the country can ill afford. It also raises questions about the decision to depreciate the Pakistani rupee.

The logic of depreciation was to make the export sector more competitive but in an import-dependent economy, depreciation is likely to increase domestic prices by a similar amount. The petrol price had to go up simply because the value of Pakistani currency has gone down and petrol is an imported good. The only way to control its price is to reduce the tax charged to consumers. This is a decision that both the PPP and the PTI are unlikely to choose. The fiscal situation in the country is too precarious, and without fundamental tax reform, there is little chance that petrol’s status as a revenue-generating commodity will change. The fear that petrol price inflation will impact economic growth itself is a real one. Similarly, the impact on the export sector will be a negative one. But this says little about whether the price hike itself was avoidable. The response the hike has provoked is much more a function of it being election year than any serious alternative economic plan from the opposition.


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