Comment: No, if you ignore a default, it does not go away

Published: May 10, 2012

The energy policy calls for subsidising expensive power with money we do not have, rather than investing in cheaper sources of electricity. PHOTO: FILE

KARACHI: Forget what all of the television anchors and commentators are telling you: right now, there is nothing more important happening in Pakistan than the fact that the government has effectively defaulted on its sovereign obligations to power companies.

Maybe it is because we as a nation are jaded and used to seeing our country be seen as an economic basket case. Or maybe it is the general incompetence of journalists in Pakistan and their abject failure at reporting anything to do with substantive policy decisions. But just because we are ignoring the fact that our country has defaulted does not mean that the default will go away. Fiscal distress haunts a nation – any nation – like an invisible spectre that will refuse to be ignored and will infect absolutely everything.

It may surprise most Pakistanis to learn this, but our government has actually been pretty good about paying its creditors on time. On its international obligations, Islamabad has never defaulted (though we have come scarily close several times).

This time, however, we have managed to refuse payment to our own power companies, which have fairly iron-clad contracts that include provisions that simply say this: if the state-owned companies that purchase electricity from these independent power producers fail to pay, it is legally regarded as the government of Pakistan itself going back on its own full faith and credit.

The government has been going back on its word to other companies too. Engro Corporation has a sovereign guarantee for an uninterrupted gas supply of 100 million cubic feet per day for its fertiliser plant. The government is far from honouring that commitment, despite injunctions from the Sindh High Court that it is obliged to.

So how is the power company default different?

Because it represents something much bigger: the absolute failure of Pakistan’s energy policy, which calls for subsidising expensive power with money we do not have, rather than investing in cheaper sources of electricity.

So why does the government do something so blatantly stupid? Because every time they raise power tariffs, the entire media gets into a frenzy about “the poor”, not realising that it is probably better that the poor pay a little extra on their monthly power bills rather than lose their job at the factory that will likely shut down because the government keeps promising subsidy payments to power companies and then fails to keep its word, causing them to cut power to industry.

Yes, the government is often stupid, and it is kept stupid by our stupid journalists, who whip up a populist frenzy with absolutely no understanding of what they are doing. Instead of exploring different policy options, they castigate and malign as a blood-sucking demon absolutely anyone who proposes any sort of solutions that do not involve giving away free stuff.

And this default will have larger consequences. Pakistan’s power demand is expected to double over the next decade. All of that electricity has to come from somewhere. But after this fiasco, who do you think will invest in setting up power plants in Pakistan? The silence from international investors will be deafening. You might even hear it over the roar of your generators which you will have to run almost constantly.

Yet the finance ministry seems absolutely unconcerned at the fact that Pakistan’s international creditworthiness lies in tatters. When a reporter from The Express Tribune called the ministry for comment, they responded that it was not their job and that the reporter should contact the water and power ministry.

Yes, you read that correctly. The ministry of finance thinks that sovereign default is none of their business. It is a pity incompetence is not illegal.

So how does this all end?

One fine day, PSO will run out of oil because they have not paid their international suppliers. It will then stop supplying fuel to power companies, which will then cut down production to near zero. The government will try its usual ad hoc measures. It will beg the Saudi, the Kuwaitis and the Iranians for free oil. They will refuse. It will then try to force PSO to release its reserves, but PSO will not have any. So it will try to buy time by finding money from other sources, except that there will no more left. That is when the country will completely shut down.

After several months with 20-hour power outages everywhere (except possibly Karachi), the government will then do the right thing: eliminate subsidies and focus on efficiency. Or maybe I am just delusionally optimistic and painting a best-case scenario.

Published in The Express Tribune, May 10th, 2012.

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Reader Comments (9)

  • sam
    May 10, 2012 - 7:12AM

    farooq, i must compliment you for being one of the very few journalists who is actually focusing on real issues in pakistan. i just cant understand why we as a nation are consumed by political considerations and not focusing on economic policy matters. i have yet not come across any talk show or political debate that focuses on highlighting the tough choices that pakistan has. i do think this is one of media biggest blunders. pakistan’s default is a huge event, but sadly, i dont think people understand how large the ramifications of this will be.

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  • JS
    May 10, 2012 - 10:22AM

    Everyone here should realize that almost all of pakistan’s political, social, military, and intellectual problems stem from our complete mismanagement of a potentially powerful economy. Nobody who works for 9-5 has the time, energy, or thought process to go blow himself up outside a girls school…

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  • Zainab Imam
    May 10, 2012 - 11:22AM

    Farooq, thanks for this brilliant piece. No one else has the competence or the guts to write something like this — and certainly not to write this well.
    Here’s hoping the government is listening. They would have to be deaf if the sound of this piece doesn’t shake them up.

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  • May 10, 2012 - 1:30PM

    Yes – In this case, you’re an Optimist.

    Keeping in mind the interest of Mass Media which gets orgasmic pleasure after Supreme court detailed report on PM and keeping in mind the interest of political parties and their concerns behind the ‘significance’ of producing new provinces, I think this default will go undetected.

    I think our Economy, which had been living on antibiotic policies, is closing its expiry period after this

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  • May 10, 2012 - 3:07PM

    As bold, direct and optimistic as ever. Beautifully written, Farooq.

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  • Meekal Ahmed
    May 10, 2012 - 4:28PM

    This is very good. Thank you for being blunt and truthful.

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  • Cautious
    May 10, 2012 - 7:00PM

    Nice article – the ramification of defaulting on debt are significant and it’s unfortunate that it’s not obvious to many Pakistanis. It boils down to weak leadership pandering to an uneducated populous.

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  • Murtaza Ali Jafri
    May 11, 2012 - 1:23AM

    Exceptionally well written. kudos.

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  • May 11, 2012 - 3:51PM

    Beautiful! Proud of ya Farooq! I wanna add that there’s the financial side of the story too. First is the Banks that have loaned money to these IPP, their Balance sheet will detoriate, which may result a run on the bank by mutual funds. Maybe these banks will go belly up. Seeing this, other banks will get nervous about holding commercial paper with sovereign guarantee and they will start to dump it. Once the boat rocks, it rocks everything. Treasuries will get a jolt too. If treasuries move, that risks the whole Pakistan Banking sector because every commercial bank is up to eyeball in treasuries. If State Bank steps in to provide liquidity to the REPO market to make a dent, the action risk rupee devaluation because there is no reserve to support the new liquidity. For State Bank, it may come down to “Either the Banks or the Rupee”

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