Analysis: You can either have ‘ghairat’ or ‘relief’, not both

We don't want to pay our taxes but we do want the government to continue providing us with relief through subsidising

KARACHI:

For the average Pakistani, the fiscal year 2013 budget will include some good news and some bad news. The good news is that the government will probably not be able to continue subsidising your electricity bill. The bad news is that it will try anyway.

It is the central irony at the heart of every democracy: the people are at once its greatest asset and its worst enemy. In the case of Pakistan, almost none of us want to pay our taxes but all of us want the government to continue providing us with ‘relief’ by subsidising our electricity, our petrol, really anything we can possibly persuade them to subsidise. Yet if the economy is to thrive, the government must ignore our extremely short-term, highly immature demands and do the right thing: stop subsidising our current consumption of electricity and invest in the long-term infrastructure that will provide affordable power to all Pakistanis.

Let’s look at the numbers. The government will probably spend close to Rs450 billion this year in subsidies, the  overwhelming bulk of which go to our collective electricity bill. That amount is more than it spent on the salaries and pensions of its 1.4 million employees and even more retirees. It is more than we had hoped to receive from all foreign donors (US, UK, Japan, EU, World Bank, Asian Development, and others) combined. And it is more than we spend on education, health and public safety combined.

With the budget deficit likely to exceed 7% of the total size of the economy this year, it is worth asking where the government’s second-biggest discretionary item of spending is going (the biggest is defence). Can we be getting better value for our money?

It turns out that the answer is yes. Over 90% of these subsidies do not go to the poorest consumers in the country, with the vast majority going to middle class consumers who would certainly grumble at having to pay more but would by no means be starving.

This is not money we have, but rather money that we beg and borrow from the outside world or steal from our people by printing more money and causing inflation. One suggestion might simply be to stop spending it, which certainly would be helpful.

If the government had stuck to its promises over the last three years of cutting subsidies to only the barest essentials, the federal budget deficit would have averaged closer to 4% of the gross domestic product, instead of over 6% of GDP. This is not a healthy number, but at least a more manageable one.

It would also have meant not having to beg Washington for money, which would certainly please the “ghairat” crowd who want Islamabad to stop doing everything Uncle Sam asks for. Regardless of whether or not you agree with that idea, step number one in achieving that would be stop asking the US for money.

Unfortunately, this approach would leave Pakistan with a low budget deficit but the highest electricity costs in the entire region, rendering our economy uncompetitive. A more practical approach, therefore, would have been to invest that excess money in cheaper sources of electricity.

Over the past three fiscal years, the government spent about Rs662 billion in subsidies beyond its budget. If they had stuck to their budgeted amount for subsidies and spent that excess amount on something like coal-fired power, we would have been able to replace more than 6,500 megawatts of oil-fired power (which costs Rs18 per unit) to a source that costs only Rs6 per unit of electricity.

There are many other sensible policy options before the government when it comes to resolving the power crisis. Unfortunately for our populist politicians, none of them involve continuing the subsidies.

Published in The Express Tribune, May 30^th, 2012.