What will be the effects of oil price increase in the short term and long term on Economy

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oil price effect on economy

The federal government on Thursday night increased the oil prices in the country by Rs 30 per litre, the biggest one-time increase in the history of the country. According to the federal finance minister, the government took this decision out of compulsion as the subsidy on oil products is a huge burden on the exchequer, and still, the government has partially abolished the subsidy even after increasing it by Rs 30 per litre. The government is giving money out of its pocket to the people for cheap petrol and diesel.

On the one hand, the common man seems to be deeply affected by the decision of the federal government to abolish subsidies on oil products and increase prices. How accurate is it to be called better?

How will the common man be affected by the increase in petrol and diesel prices?

According to the federal government’s decision, after the increase in petrol and diesel prices by Rs 30 per litre, the inflation rate in the country is likely to increase. According to the data released by the Pakistan Bureau of Statistics, the inflation rate in April was close to 13.5 per cent. According to Dr Hafeez Pasha, former Finance Minister of Pakistan, the rise in prices of oil products could bring down the inflation rate from 16 to 17 per cent.

If we look at the various sectors in the basket of inflation in Pakistan, it weighs about 35% of food items, while the transport sector’s share is about 6%. Dr Pasha said that those members of the society who are financially weaker sections would be more affected, and with it, the urban middle class will be more affected by this increase. He said that there are 20 million registered motorcycles in the country, and the increase in petrol price would increase their fuel consumption. The increase in petrol and diesel prices would increase the rate of inflation. He said that this increase would increase the rate of inflation by three to four per cent, and those financially weak members of the society would be severely affected by this situation.

The budget of an ordinary person will be badly affected by the new wave of inflation, and it may be difficult for them to meet the necessities of life now. Economist Dr Khaqan Najeeb said that the increase in the price of diesel and petrol would inevitably affect the common man as the cost of private and public transport will increase, and the cost of goods transport will increase and become more expensive. Muhammad Amin, a procurement manager at a food company, said that he found that the fare from Karachi to Lahore and Islamabad increased Rs on Friday morning. 20,000 to Rs. 30,000 more.

Dr Najib said the government would have to take immediate steps to protect the common man from rising petrol and diesel prices, including rickshaws, motorbikes and agricultural purposes with eligible families under the federal government’s income support program. On the other hand, the government should eliminate or reduce the toll levied on goods transport at toll plazas so that goods transport does not pass on the full effect of increased diesel prices to the people.

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Why did the government take steps to increase the prices of oil products?

The Rs 30 per litre increase in the price of oil products by the federal government in Pakistan is the biggest one-time increase in the country’s history. The move by Finance Minister Muftah Ismail has been described as a coercive one. The previous government had frozen diesel and petrol prices from March 1 following the rise in world oil prices. However, the government had to pay a subsidy of Rs 144.15 per litre for diesel and Rs 149.86 per litre for petrol. The government had to pay Rs 33 billion in March, Rs 60 billion in April and about Rs 120 billion in May.

On the one hand, the government has to pay billions of rupees monthly subsidy from the exchequer; on the other hand, the IMF has made the resumption of the loan program for Pakistan conditional on the abolition of subsidies on oil and electricity. The suspension of the IMF program has also cut off funding for Pakistan from other international institutions. Dr Khaqan Najeeb said that the monthly cost of running the federal government in Pakistan is Rs. 40 billion, while the value of subsidy on oil has reached Rs. 118 billion rupees.

Dr Pasha said that according to the value of the subsidy every month, the country has to pay a subsidy of Rs. 1200 billion on an annual basis, while the annual expenditure of the federal government is Rs. 400 billion. He said that the country is facing a loss of Rs 400 billion.

What will be the long term effect of rising petrol and diesel prices?

According to economists, the country’s economic situation cannot afford the billions in monthly subsidies on oil products, which has led to a sharp rise in the country’s budget deficit, and the International Monetary Fund (IMF) Has stopped the resumption of the loan program. According to experts, the rise in oil prices will affect the common man, but under the long-term policy, it is better for the country’s economic situation if its budget deficit is reduced and its positive impact on global financial Assist in obtaining financing from institutions.

Due to the rise in prices of oil products, the dollar depreciated sharply in Pakistan on Friday, while the stock market also showed a bullish trend. According to Zafar Paracha, general secretary of the Exchange Companies Association, the reason for this is the resumption of the IMF program due to the partial elimination of subsidies, which had a positive effect on the currency and the stock market. Dr Hafeez Pasha, on the partial elimination of diesel and petrol subsidy by the government and increase in its prices, says that the existing subsidy will also end in the coming days as Pakistan has to make a budget. Money is needed, and this is not possible without the IMF.

He said Pakistan needed 7 billion dollars in external payments by the end of the current financial year, while 30-30 billion dollars would be needed next year. This amount will bring stability to Pakistan’s external payments sector, which is not possible without the IMF program. He said that this is not a few billion dollars from the IMF but also from other financial institutions, which look to the IMF to give money to a country. Dr Pasha said that the abolition of subsidies would reduce the fiscal deficit and support payments in the country’s external sector because money would come to Pakistan in the case of this subsidy.

Dr Khaqan Najeeb said that when subsidies are given, the fiscal deficit of the country increases and its elimination will help reduce the fiscal deficit, which has become the biggest problem for the country at present.

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