Commenting on the Prime Minister’s relief package, the independent Economic Advisory Group (EAG) acknowledges that the government should implement targeted relief measures to protect vulnerable segments of society from the global commodity price shock whose effect is being felt by Pakistani consumers too.
The relief package has cut Petrol and diesel prices by Rs. 10/liter in effect from 1st March by reducing petroleum levy (PL) on petrol, diesel, and kerosene oil. It may be recalled that during the first half of the current fiscal year, the government had collected large revenues on account of additional customs and GST on petroleum products.
EAG notes that the size of the package, worth Rs. 250-280 billion, is almost 0.5 percent of GDP, and the government does have fiscal space as demand pressures are not excessive. However, the allocation of this resource needs fiscal prudence to maximize benefits for households with low purchasing power. The government would have been well advised to rely instead on its Ehsaas infrastructure to deliver additional cash support to deserving households.
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EAG has also expressed its reservation on the PM announcement of fixing petrol prices till the FY2022-23 budget. Not only is this likely to be unsustainable, but it may also create shortages in the near term, thus potentially exacerbating the crisis. If oil prices rise further from current levels, the government may find itself having to precipitously raise prices later, whose impact may be worse.
PM’s decision to provide benefits of various sorts–lower fuel & elec prices & subsidized loans & tax exemptions for selected sectors–continues long & inglorious tradition of country’s top leadership enacting policies erratically in defiance of the most basic econ principles1/3
— EAG Pakistan (@eagpakistan) March 1, 2022
Solution for an efficient economic system
EAG has emphasized that for an efficient economic system, it is essential that prices be linked directly to costs, and thus any promise to keep future prices constant is not credible. When underlying costs rise, as they do when international commodity prices increase, the government cannot insulate the entire populace from higher domestic prices without creating an excessively high debt burden for future generations.
Insufficient tax collection from broad swathes of the economy, and a lack of productivity relative to other countries are at the core of our economy’s ailments.
EAG has cautioned that while relief measures are popular, the strategy of blanket price cuts through arbitrary use of fiscal policy dilutes the government’s credibility and questions its commitment to undertake the reform process.
Read more: EAG welcomes focus on economy, cautions on overstretch of NSP
EAG is an independent policy group, comprising individuals from economics, policy, and the private sector, which deliberates regularly on economic developments and shares its views with the government and public. It is supported by PRIME, an independent think tank.