POL U-turn: short term relief

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KARACHI – The government is likely to suffer a potential revenue loss of Rs 28.9 billion in the second half of financial year 2011 if oil prices sustained current levels. The government had to slash Petroleum Levy (PL) on different products in order to keep petroleum prices stagnant.
Market analysts lamented that the government’s decision to withdraw an increase in petroleum products prices will only be a short-term relief. However, in the long-run it has far reaching consequences mainly in the face of fiscal imbalances. The withdrawal came after the government was faced with immense pressure from the coalition partners. Axing Petroleum Levy and deferment of reformed General Sales Tax would result in revenue loss for the government, thus threatening a further increase in borrowing to plug the fiscal gap. The current year has seen the government borrow Rs 459 billion so far, which is annually 99 percent higher.
Borrowing from State Bank of Pakistan alone has swelled by an annual 369 percent to the tune of Rs 272.3 billion compared to the same period last year. Fiscal deficit targets for financial year 2011 stand at 5.9 percent, but higher oil prices combined with a continued decline in PL would certainly pitch up targets by approximately 0.3 percent.
The government is now under pressure as increasing taxes through reformed GST or flood surcharges hangs undecided, while taking up austerity measures resulted in the loss of parliamentary majority. Increasing oil prices still threatens inflationary expectations in the short run, but higher borrowing would certainly exert inflationary pressure in the long-term.
Such borrowing practices have already been highlighted by the SBP as their main intuition for raising the policy rate, said Saad Khan at Arif Habib, adding that not only has the government borrowing led to private sector crowding out but has also limited capacities for future tax generation from the private sector in the country. Similarly, it is plausible that government borrowing would sustain an incremental pace and would result in a possible hike of 50bps in the coming monetary policy, he added.