Lessons from Kazakhstan’s political crisis

Smartest way to reduce economic vulnerability is to displace $15-16b of annual energy imports

KARACHI:

Prices are rising everywhere and for nearly everything. The United States has reported a whopping 7% inflation.

Globally, there is panic and resentment among the masses. People in the middle and lower-income brackets are feeling marginalised, frustrated and angry.

No wonder, the world is moving towards “common prosperity” and reducing “social inequality”. There are lessons to learn here, especially for the PTI.

It’s a statistically tough luck that you get to govern during the phenomena which are otherwise once-in-a-decade events. How often does a jet fight with India, pandemic and historic high commodity prices occur in three years, anyways? Irrespective of these external, uncontrollable and growth-denting events, the masses suffer from short-term memory loss. Immediate comparisons are drawn with previous political governments. And rightly so!

Kazakhstan, our relatively affluent neighbour, is undergoing a political turmoil that can spread to other emerging markets. It started when the government of Kazakhstan decided to deregulate market prices of LPG that would have resulted in a twofold rise in LPG prices.

Of course, the latent dismay with the authoritarian regime was partly the accelerator for the riots. But waves of human protests eventually prompted the ruler to call for Russia’s military help. Not that Pakistan needs anyone’s help but anger over inflation is boiling over.

Initially, the government was riding a lucky wave of post-Covid low oil prices that the relief was passed on. However, under a strict IMF programme, coupled with the poor reserves, Pakistan has no choice but to stop subsiding and fully tax the oil products.

Had there been no IMF programme, policymakers could have been lax and ostentatious in keeping the prices low. In such circumstances, forex reserves could have depleted, external debt increased by $4-6 billion and tax revenues dented as well. Not a choice anymore.

Passing blame

Well, it’s not about the IMF programme all the time. It’s easy to pass the blame onto external parties to absolve yourself from the guilt.

Nonetheless, it’s time for decision-makers to a) plan until election and b) plant after election.

If the plan is to make it difficult for the next ones, then the strategy – or the lack thereof – is simpler. It’s the structural reform that requires more efforts. The path to prosperity is never easy. There is an increasing consensus on oil prices heading towards $100 a barrel this year and probably higher next year.

Similarly, the Russia-Ukraine tiff could add further supply uncertainties. If oil prices cross $100, Pakistan can cry foul that this was an external event as well that we couldn’t be prepared for.

Evidently, Pakistan’s low exports of goods and services can hardly finance our basic importing needs. Invariably, the export growth is the only solution to our low-growth, debt inefficiency trap.

Until the needle is moved and economic mindset is changed, policymakers need to plan today for year 2028 and beyond. The smartest way to reduce economic vulnerability is to displace annual energy imports, which consume nearly $15-16 billion. With no change in policies, these could balloon to $20 billion in a few years. Let’s accelerate the displacement.

Electric vehicles

Look around you. Two-wheeler bikes are everywhere. Given Pakistan’s demographic and socio-economic outlook, demand for bikes is likely to remain strong for the next decades. In addition, fuel imports in Pakistan are used predominantly for the transport sector. Within this sector, the growth is higher for petrol vehicles. Within those vehicles, two-wheelers are driving the growth.

Electric vehicles (EVs) – while still expensive compared to the internal combustion engine (ICE) vehicles – need to be aggressively incentivised.

In India, the country with similar socio-economic indicators, Ola Electric and Hero Electric are launching bikes for $1,000 apiece. Not entirely affordable, but a good start.

Pakistan too needs to prepare itself for the change. Not just in fuel imports but also environment as well.

Rising smog and pollution levels have already disrupted economic operations apart from burdening the dilapidated healthcare system. A few steps the government can take are: One, zero sales tax on imported two-wheeler EVs.

Two, 10-year income tax holiday for domestic assemblers of two-wheeler EVs.

Three, tax rebates on raw material imports for domestic assembling of two-wheeler EVs.

Four, free parking for two-wheeler EVs.

Five, free insurance for two-wheeler EVs.

Six, 0% interest-free financing for two-wheeler EVs.

Seven, subsidised financing for import of machinery for the manufacturing of two-wheeler EVs.

Eight, free maintenance and service for two-wheeler EVs for first three years.

Nine, cheaper electricity rate for households owning two-wheeler EVs to incentivise charging.

These are among a few steps that can be taken to advance the use of EVs in Pakistan and with the end objectives to reduce the import bill, protect the socio-economic equilibrium and reduce the inflationary impact on the lower middle class.

A conventional bike consumes fuel worth $1.5 to run 100 km. An EV can cover the distance with one-sixth of the variable cost.

A local bike worth $400 consumes fuel worth $150-200 per year. Essentially, the investment of $100 million in EVs can displace energy imports worth $25-30 million per year. That’s a three to four-year payback period on the investment.

Any sane investor would grab the opportunity. It’s an eventuality. As always, we could be late in the party.

If the global commodity cycle continues its ascent, there are high chances that the opposition parties could be able to bring the masses on the streets. Not that it would serve our long-term geo-political ambitions with Afghanistan quagmire and worsened relationship with the US and India in the background.

However, that would be a noise the government should and can avoid. Policy choices require a leap of faith.

It is said that the current EV policy hasn’t attracted a lot of interest. Don’t undo the efforts. Make it happen. Otherwise, oil in triple digits will be a tragic story.

The writer is an investment specialist with keen interest in political economy

 

Published in The Express Tribune, January 24^th, 2022.

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