Petroleum Subsidies Acted as Double-Edged Sword for the Economy: Economic Survey

The relief package on oil prices in the country given by the previous government acted as a double-edged sword as it not only increased the budget deficit but also reduced the fiscal space, according to the Pakistan Economic Survey (PES) 2021-22.

“To offset the inflationary pressure, the government initially tried to provide relief to the masses by maintaining domestic oil prices. However, as international commodity and energy prices continued to rise, providing relief acted as a double-edged sword, potentially increasing the fiscal deficit, and reducing fiscal space”, the survey said.

The survey said that “despite a significant rise in tax collection during July-March FY22, higher current and development expenditures widened the fiscal deficit to 3.8 percent of GDP against 3.0 percent in the previous period”.

Due to additional spending under COVID-19 funds for vaccine procurement, IPPs Circular debt payment, social sector spending, and higher development expenditures, the fiscal sector remained under tremendous pressure.

All these factors, along with the global economic challenges posed by the Russia-Ukraine conflict, as well as the impact on international commodities and oil prices, have increased the risk of fiscal slippages during the current fiscal year, the survey said.

To avoid severe fiscal imbalances and to ensure that fiscal consolidation would remain on track, the government has reduced the subsidy by raising the price of petroleum products. At the same time, the government is providing targeted subsidies to protect vulnerable segments of society from rising oil and commodity prices.

The government is determined to restore fiscal sustainability through effective revenue mobilization and prudent spending, the survey said.

In this regard, key priorities include increasing the tax-to-GDP ratio through various tax policy and administration reforms, as well as reducing unnecessary spending through austerity measures. Furthermore, the emphasis is on rationalizing untargeted subsidies and reducing the losses of public sector enterprises through improved governance.

“These measures would provide significant assistance in controlling expenditure slippages and increasing revenues, thereby lowering the fiscal deficit in the medium to long term”, the survey said.



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