Sat, Jan 08, 2011 - Page 5 News List

Pakistan bows to pressure on fuel price

BAD MOVE:The PM’s decision to reverse the price increase has drawn fire, with the US and analysts saying it will undo progress to provide a stronger base for the economy


Pakistan’s prime minister has agreed to reverse an unpopular fuel price hike under pressure from opposition parties, as he seeks to save his shaky government following the defection of a key coalition partner.

The US called the decision a “mistake” and the IMF, which has an US$11 billion loan program with the nuclear armed nation that depends partly on it making painful economic reforms, also voiced misgivings.

The decision — which a Pakistani official said could cost the government US$58 million a month — along with delays in a planned tax reform could make Pakistan miss its budget targets and endanger remaining payments from the IMF loan.

“All the political leadership has agreed that fuel prices should be reversed,” Pakistani Prime Minister Yusuf Raza Gilani told the National Assembly on Thursday. “I announce a restoration of the prices” to the levels they were on Dec. 31.

The rollback of the 9 percent price increase, which took effect on Friday last week, was one of several demands made of Gilani’s Pakistan People’s Party by former prime minister Nawaz Sharif’s Pakistan Muslim League (PML-N).

Chaudhry Nisar Ali Khan, leader of the PML-N in parliament, said Gilani had “bowed to the demand of this parliament,” calling the move a “big act.”

One of Gilani’s main coalition partners, the Muttahida Qaumi Movement (MQM), announced on Sunday that it was leaving the government in protest of the fuel policy, leaving the prime minister without a majority in parliament.

MQM leader Faisal Subzwari said on Thursday that while his party appreciated the decision to reverse the increase, it would not rejoin the government.

US Secretary of State Hillary Rodham Clinton said she warned Pakistan’s ambassador to the US on Tuesday against reversing the price increase.

“We have made it clear, as I did in a meeting with their ambassador, that we think it is a mistake to reverse the progress that was being made to provide a stronger economic base for Pakistan and we will continue to express that opinion,” Clinton told reporters at a news conference.

Analysts also criticized the decision because they said it would negatively impact Pakistan’s fiscal deficit.

“This reinforces the feeling ... that political instability is beginning to affect economic decisions,” said Sakib Sherani, an independent economist who recently resigned as the economic adviser to the government.

“This is very regressive and there is no justification for it,” he said. “We’re not presenting any viable fiscal measures to counter the deficit.”

In 2008, Pakistan linked its domestic oil prices to international oil prices.

The decision to reverse the price hike means the government will have to provide a fuel subsidy, increasing its spending and widening its budget deficit by as much as 0.2 to 0.3 percentage points of GDP in the 2010-2011 fiscal year, Sherani estimated.

A senior Petroleum Ministry official said that the reversal would cost the government around 5 billion rupees (US$58 million) monthly.

Combined with a delay in implementing a new reformed general sales tax, analysts said the deficit target of 4.7 percent of GDP for the current fiscal year would be almost impossible to achieve.

This could imperil the remaining payments of an US$11 billion IMF loan to prop up the economy, which is contingent on ending subsidies and widening the tax base.

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