Thursday, 24 March 2011

Why I dislike the increase in prices?

Ask any freshman Economics student and he will tell you that the increase in prices is needed for the the supply to meet the demand. It is essential for the smooth working of the economy. Why then do I disagree with government of Pakistan when they increase fuel and commodity prices and taxes.
As pointed out above, the increase in prices bridge the gap between demand and supply. But in Pakistan, even when the prices skyrocket, the goods are often not available. This is a seasonal effect. In winter, the price of sugar starts rising and it almost doubles. This, the government says, is due to shortage of the sugar available. But then, even when the market is full of sugar, the prices dont go down, which confuses the best of economists.
Moreover, for the past two years, the word CIRCULAR DEBT(CD) featured many times in the news bulletins. This means the prices at which the government provides electricity is lower than the cost the government incurs when it produces it. So in order to end this CD, the prices needed to rise. So we saw first an increase of 6%, then 12% and then a subsequent 6%. Now the government talks about raising the tariff a further 1%. What is surprising is that the CD is still there and has not been reduced significantly, where as we are paying almost double of what we paid two years ago for a unit of electricity!
Furthermore, the government has been pushed by IMF to increase tax revenue. What the IMF meant was to broaden the tax base, but the government has opted for the easier solution. FLOOD TAX! A new tax on the existing tax payers. ( There is some talk of widening the tax base but I wont believe it until it is actually done.) I would not have objected to this Flood Tax, had it been the case, that enough tax had been collected to run the economy. But all I see, is the government running off to IMF to secure more tranches of the loans. There is no plan as to the repayments of these loans, they are just rising. $53b the last time I checked. There is no explaination as to what has been done with the petroleum levy (previously known as carbon tax)?
So unless there is any sign of the economy improving, i will keep disliking the rise in prices and taxes.