Fiscal Policy Dilemma


Brent crude rallied in the international market as the nation celebrated Eid, which must have made for a pretty anxious annual holiday for the finance minister. For, he’s still no closer to solving the number-one fiscal dilemma of this administration. And that’s when, and by how much, to remove the cap on petrol prices; because on this decision hinges not just what kind of shape the next budget will take, but also whether or not the IMF bailout program will be revived. But it comes with such huge political opportunity cost that there’s no question of doing it just yet.
That made the recent Saudi tour that much more important. Word is that the government has made a formal request to extend the ongoing relief program, which should keep reserves beefed up and provide cover from too much oil price volatility. But nothing’s decided yet, and going by some of its conditions, it didn’t seem as if the Saudis were too eager to give the loan or the oil facility in the first place. There are also plans to go to China with a similar request; even though it remains to be seen if the killing of Chinese citizens in the Karachi University terrorist attack will slow it down. The plan seems to bolster reserves enough to turn the petrol price relief into targeted subsidies for specific income groups and then go back to the Fund to revive the Extended Fund Facility (EFF).
The point to note in all this is that the petrol price freeze of the previous administration crippled the system in such a way that all the debt being picked up in a hurry will go up in air simply to finance it; and the country will be left to pay it back with interest. Untying this knot was, and remains, Miftah Ismail’s biggest problem. Prices must rise, and so must the interest rate. But selling these facts to the public is an entirely different thing.