The country is already in the midst of high inflation, depreciating currency, and low reserves, but with the IMF deal, it just got its breath back. In this era of give and take, IMF also had some strings attached, it placed conditions on the rollover by aligning tariffs with cost-targeting power subsidies and increasing the tax base.
These conditions led to soaring price levels in the food, energy, and power sector. Fuel prices triggered to a 300 mark per liter, petrol rose by 14.91 to PKR 305.36 per liter, and diesel by 18.44 to 311.84 per liter in the month of September 2023. The rate is all time high with the continuous depreciation of Pakistani rupee and high crude oil prices touching $90 a barrel in nearly eight months. The recent increase in fuel price is mainly attributed to rupee depreciation in the recent past.
The US dollar which was at 226.43 in Jan 2023 has now plunged to more than 300 rupees. This has also impacted petroleum prices heavily as on Jan 1, 2023 petrol price was Rs 214.93 per litre but now it has reached at Rs 305.36 while diesel in the same time has reached at Rs 311.84 from Rs 227.83 per litre.
These drastic changes make the economy more vulnerable and add misery to the people. The Increase in transportation costs affects all types of industries. The cost of doing business increases sharply and the producers have no choice but to raise the prices. Increase in prices led to fall in sales which ultimately hit the sales of the companies, trimming industrial output. The large-scale manufacturing industry experienced a decline of 10.26% during FY23 as compared to last year.
Pakistani industries are already under pressure due to increase in power tariff and record interest rate, which might see another rise in upcoming monetary policy. The recent rise in fuel prices is a further blow and would be a nightmare for the industries whose survival is on stake.
People are fumed by the decisions made by the authorities concerned and protest to revise the prices of fuel and electricity. The major factors that accounted for the setback are restrictions on imports, weak macroeconomic indicators, and an increase in energy costs which badly hurt the industrial pattern.
President Mohammed Tariq Yousuf of the Karachi Chamber of Commerce and Industry has said that 50 percent of industrial units have already been closed and the remaining will also be shut down due to the exorbitant energy prices. Industries that are dependent on cargo shipping and freight services are adversely impacted.
Underprivileged and middle-class usually rely on public transport and how a person earning just 30,000/- could afford increased fares owing to rise in diesel prices.
The hike in diesel has proven to be highly inflationary as the fuel is mostly used in heavy transport vehicles, trains, and agricultural engines like trucks, buses, tractors, tube wells, and threshers. This adds to the prices of vegetables and other eatables.
On a year-on-year basis, oil sales in August declined by 8 percent, dropping from 1.53 million tons in the same month of the previous year to the current 1.41 million tons.
The sales of total petroleum products in two months of the current fiscal year declined by 7 percent to 2.76 million tons from 2.93 million tons in the same period of the last fiscal year. This decline can be primarily attributed to a significant 64 percent decrease in the demand for furnace oil, primarily used for electricity production.
The government’s decision to reduce reliance on power production using furnace oil was an attempt to control the rising cost of electricity production and subsequent inflation in electricity bills.
The caretaker government links the hike in the prices to a global increase in petroleum prices and the implications on the exchange rate. Moreover, the flattening economy and a hike in interest rates will add more burden to the situation.
Amayed Ashfaq Tola, Advocate High Court, President Tola Associates, said the increase in petroleum prices will result in increased inflation.
In particular, the Food basket in the overall National Consumer Price Index (“NCPI”) will be affected, for two main reasons:
- The transportation cost of the food items will be increased and that will be directly passed onto the consumers in the absence of strict price controls.
- An increase in Diesel price directly inflates the cost of agriculture products, as diesel engines are used in harvesters, tractors etc. The Food basket has an overall weightage of 34.58% in the NCPI. As such, any impact on the food prices constitutes around 1/3rd of the increase in NCPI.
The “Housing, Water, Electricity, Gas & Fuels”, group in the NCPI, will also be impacted due to, inter-alia, rising electricity rates per unit consumed and increasing fuel costs. Additionally, the rise in fuel prices will impact the prices of water tankers procured in areas that do not have access to water lines. The aforesaid group carries a weight of 23.63% in the NCPI, he explained.
Therefore, the impact of these price increases in the NCPI will be notable. Lastly, the increase in electricity and petroleum prices will have a negative effect on the industries.
It will substantially increase their cost, which will make exports uncompetitive with regional competitors. It will also affect the daily wager as an increase in transport cost will mean less disposable income for them, unless their daily wage is proportionately increased by their employers,” said Amayed.
Abdul Azeem, head of research at Spectrum Securities said that the limited economic activities not only increase unemployment and add further poverty in the country.
When asked what would cause higher inflation to rule out chances of stability at interest rates, he said that the inflation in the country is driven by the supply side issue therefore, the higher interest rates will not reduce the inflation. The stable interest rates will keep the financial cost of the production stable and reduce the pace of inflation.
Yousuf Saeed, head of research at Darson Securities said if inflation increases more than the estimate then there will be no stability in the interest rate and it will further move upward.
The government lacks planning and is unable to foresee the future uncertainties and the red flag that is always harboring our country. It needs to make out a plan which can make all stakeholders happy for the country to progress.
The country needs strong fundamental reforms supported by strong governance to oversee the impacts of the decisions made that can keep the engine running. The government should opt for alternate energy resources such as solar power, geothermal energy, hydropower, ocean energy, bioenergy, and wind energy to mitigate the risks prevailing in the country to stabilize Itself. Moreover, it can focus on improving the efficiency of the country’s production and transportation system which are less reliant on petroleum. The government should also focus on green finance and investments.
