Gas price hike

The caretaker government has finally bitten the bullet and withdrawn a Rs50 billion subsidy on gas prices to fertilizer plants. The decision came alongside the second gas price hike on the watch of caretaker Prime Minister Anwar-ul-Haq Kakar, who has been in the hot seat for a mere six months. Both these calls fall within the category of unpopular decisions in the face of which an elected government would be squeamish. What is more, either has its merits and demerits, which makes either a matter of juggling priorities: While a subsidy withdrawn per se bodes well for the budget bottom line, its full impact includes commensurate hikes in the prices of fertilizer, a key farm input, in turn inflating food prices; higher gas prices for businesses and households respectively represent higher inflation in general and a bigger drain on income in the form of higher monthly cost of keeping the kitchen fire going.

The tipping point in hiking gas prices may well have been the ability of the twin Sui companies to meet their financial obligations, any shortfalls inevitably weighing on the state coffers – inasmuch as the state-owned megaliths are too big to fail. Eventually, like all state-owned enterprises (SOEs), the Sui companies must become budget-neutral, which again dictates market prices. Then there is the consideration of the gas sector circular debt – which, incidentally, accounts for more than half of the circular debt of the country’s entire energy sector. Finally, there are the commitments the authorities have made with the IMF as part of a Stand-By Arrangement (SBA) to last Pakistan through the transition, especially as a longer-term IMG programme will be one of the top items on the to-do list of the new government.

That is not to say the gas price hike is not going to be painful. It will exacerbate inflation, already playing havoc on the purchasing power of households across the nation. The government’s resolve to protect lifeline customers by keeping prices unchanged for them is noble and all, but there really is no way the government can provide them an adequate cushion against the ravages of sky-high inflation. It does not help that the gas price hike has come amid a general upward trend in energy prices (except RLNG). Pump prices for petrol and diesel rose on the day itself, and power tariffs went up a mere two weeks ago. The combined impact of all these energy price hikes is sure to send a tsunami wave of higher inflation across the economy in the coming weeks and months. More companies may need to go bankrupt, and more workers may find their jobs vanish. This chain of falling dominoes will inevitably take a toll on growth and may even necessitate a monetary policy intervention to relieve inflationary pressure to nudge headline inflation towards the target annual rate of 21 per cent.

Still, on balance, the deck is stacked rather heavily in favour of higher gas prices. In a more mature, less dysfunctional polity, this would have been a foregone conclusion, its official announcement likely relegated to the state bureaucracy. In our unique circumstances, it has come from the cabinet itself – a caretaker government’s parting gift to the newly elected prime minister expected to take the country’s reins in a couple of weeks. Now, the incoming PM can hit the road running and take the torch further. Looking back at the tenure of PM Kakar, it is fair to say that his administration has stuck to the policy direction determined by the coalition government headed by Shehbaz Sharif. This in and of itself is an achievement for the state of Pakistan. It represents a baby step by Pakistan towards being a reliable state capable of ensuring continuity across political transitions – even when the transition is as painful as this one.