Collapse of the Global Economy

Pakistan Reverses Fuel Price Increase, Impairing Its Ability to Repay $11 Billion Loan from IMF

January 6, 2011

Reuters – Pakistan's prime minister has agreed to reverse an unpopular increase in fuel prices under pressure from opposition parties, as he seeks to save his shaky government following the defection of a key coalition partner.

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

The rollback of the 9 percent price increase, which took effect on Friday, 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 told Reuters on Thursday that while his party appreciated the decision to reverse the increase, it would not rejoin the government.

Analysts were critical of 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 told Reuters. "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 gross domestic product (GDP) in the 2010-2011 fiscal year, Sherani estimated.

A senior Petroleum Ministry official told Reuters that the reversal would cost the government around 5 billion rupees ($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 $11 billion International Monetary Fund loan to prop up the economy, which is contingent on ending subsidies and widening the tax base.

The IMF criticized the subsidies on Thursday and said the money could be better spent on social programs.

"They're inefficient and untargeted so that the bulk of the benefit from the energy subsidy goes to higher income individuals and large companies," IMF spokeswoman Caroline Atkinson said from Washington when asked whether reinstating the subsidies would derail the loan.

"We continue to work with Pakistan to see if we can reach agreement on measures that the government can put in place to put its economy on a sounder footing," she said.

U.S. State Department spokesman Mark Toner also voiced misgivings.

"Our position is that ... Pakistan needs to undertake difficult economic reforms that are going to require some pain, frankly, politically," Toner told reporters in Washington. "But they're important for its long-term economic stability."

The defection of the MQM left Gilani vulnerable to a no-confidence vote in parliament, but the threat of that appeared to have faded even before his reversal on fuel prices. Instead, analysts expect the opposition to try to slowly squeeze the government, which is already under intense pressure, on several other fronts.

Millions of Pakistanis are growing frustrated at widespread corruption, power cuts, poverty and rising inflation -- problems that risk pushing more young men to join militants groups in the South Asian country of 170 million.

($1=85.70 Pakistani rupee)

Pakistani Government Agrees to Reverse Fuel Price Increase

January 7, 2011

Washington Post - The Pakistani government, reeling from the recent loss of key coalition partners and the assassination of a ruling party governor, capitulated to the opposition Thursday and announced the reversal of a recent fuel price increase.

The decision signaled the weakened position of the government led by President Asif Ali Zardari's Pakistan People's Party (PPP), which has been under extreme pressure from opposition parties threatening to force its collapse. The unpopular price increase, enacted in an effort to raise tax revenue as the economy floundered, was cited by a main coalition ally, the Muttahida Qaumi Movement (MQM), as its reason for abandoning the government last weekend.

Though the reversal appeared to constitute a lifeline for the government, it was just one of several demands made by opponents, who are widely expected to continue to drive the agenda. The defecting opposition parties praised the move, which Prime Minister Yousaf Raza Gillani announced in Parliament, but they did not indicate whether they would rejoin the government.

"It is a wise decision by the government. . . . The prime minister has shown courage," Haider Abbas Rizvi, a top MQM leader, said in an interview. But, he added, "the government needs to devise a comprehensive plan for the revival of the economy."

U.S. Secretary of State Hillary Rodham Clinton, however, called the decision a "mistake" that would damage Pakistan's efforts to stabilize its anemic economy.

"We believe that the government of Pakistan must reform its economic laws and regulations, including those that affect fuel and its cost," Clinton told reporters in Washington on Thursday. "We think it is a mistake to reverse the progress that was being made."

Gillani said the 9 percent fuel price increase that took effect Jan. 1 would be canceled immediately, adding that the decision was made after consultations with all political parties.

"We have managed to succeed in resolving this public issue," he said.

The main opposition party, former prime minister Nawaz Sharif's Pakistan Muslim League-N, said Tuesday that the government had six days to accept a list of demands. In addition to reversing the fuel price increase, the list called for slashing government spending and implementing sentences against top government officials who have been convicted of corruption.

Sharif suggested that opposition parties would band together to oust the PPP-led government if action was not taken to implement the demands within 45 days.

Analysts say any party would be hard-pressed to meet that timetable. But with the disintegration of the government's parliamentary majority after the withdrawal of two allies from the ruling coalition, the PPP has little choice but to at least appear to try.

The fuel price rollback, however, will force the government to seek new sources of revenue, as required by the International Monetary Fund in return for an emergency loan. It has already backed away from a sales tax proposal that opposition parties had assailed and is attempting to cope with a widening fiscal deficit by borrowing from the central bank. But that move has further angered the public by driving up inflation.

Gillani's announcement came as the suspect in the killing of the Punjab provincial governor, Salman Taseer, was praised as a "lion of Islam" by hundreds of lawyers and a crowd of religious party members who gathered to watch him arrive for a hearing at an antiterrorism court in the city of Rawalpindi.

Authorities said the suspect, Mumtaz Qadri, one of Taseer's police guards, surrendered immediately after shooting the governor Tuesday, citing Taseer's public opposition to Pakistan's strict anti-blasphemy law.

Qadri's attorney, Wahid Anjum, told reporters Thursday that 500 lawyers -- part of a segment of Pakistani society generally considered secular and liberalizing -- had volunteered to represent Qadri for free.

A senior police official said Thursday that investigators were still trying to determine whether Qadri, 26, had acted with the help of his fellow police guards or at the direction of others. Anjum told reporters that Qadri had acted alone.

Top officials with the PPP, whose influence in populous and wealthy Punjab province has been weakened with Taseer's death, have suggested that Qadri was involved in a broader "conspiracy" to destroy the government and Pakistan's volatile democracy.