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Fuel price hike made govt task tougher to put economy on track

RECORDER REPORT

KARACHI: The increase in furnace oil prices made the challenge tougher to put the economy back on track for the men in 'khaki,' however, would improve the earnings of oil marketing companies during the current financial year, analysts and traders said.

The government has raised furnace oil price by 15 percent to Rs 8,377 per tonne with effect from Feb 15, 2000. This increase has come largely in response to increase in international fuel prices. The second rise in oil prices is the first of a series of actions, which are extremely unpopular in nature but a necessary.

Adnan Kundi of ABN AMRO Securities said that the recent 15 percent hike is an adjustment with the international oil price trend and not an attempt to shore up further revenue for the government coffers.

He said that it would be reversed when the international oil prices ease down. "On a fundamental basis investors should read between the lines and take it as the government determination to bring about true structural reforms in the country," Kundi pointed.

The increase obviously augurs well for the oil marketing companies as they tend to benefit from huge inventory gains in addition to an increase in the rupees per tonne margin some time back.

PSO being the largest supplier of furnace oil happens to have the largest storage facility and thus would be the greatest beneficiary due to this price increase. On the other hand cement and the power sector tend to lose the most due to their heavy dependence on furnace oil.

Fuel and electricity account increase of about 60 percent of the cost of production for cement companies and RFO price would affect both. Fuel directly; and electricity indirectly for companies having captive power units, as cost of thermal generation shall go up. Therefore, 15 percent increase in RFO price shall translate into approximately 8-9 percent rise in cost of production for cement companies.

Cost of production for IPPs will increase the financial burden on Wapda. Assuming Wapda is unable to increase its tariffs, traders expect its cash deficit to exceed Rs 50bn in coming financial year.

A leading analyst said that the increase would have a trickle down impact on the economy and would have regressive effect in terms of growth and inflation. The government would have a daunting task as the challenge before them is keeping the delicate balance between implementing structural reforms, meeting the IMF conditions, controlling the inflation, improvement in revenue collection and steady growth in exports. The cost of production of goods would rise which would affect the revenue collection, less production means lower exports and rise in prices means increase in inflation, said a local analyst.

However, with the government's promise that when the international prices of oil move down, they will review the local prices and would slash it downward, lit some hope. The cut in oil prices if done, the economy would be once again on the recovery path, said an analyst.