With loans piling, why is Pakistan waiting to reform its policies?

ISLAMABAD:

With loans of over $70bn due within the next three years, Islamabad needs to take some tough decisions – especially if donors pull the plug on debt restructuring and more bailout packages for the nuclear state. Amid the popular narrative of Pakistan being “too big to default like Sri Lanka,” the fact remains that evading a default on payments is unfortunately not possible unless we solve the twin deficit challenge posed by surging crude oil prices.

The current account deficit (CAD), which is the net difference between the total value of imports and the total value of exports, is set to continue a widening trend since the Ukraine war pushed energy prices upwards. Hence, managing the crude oil import bill to reduce the risk of much wider deficits should be our top priority.

This may be surprising, as declining exports and limited availability of the greenback hasn’t been a barrier for the capital city to buy luxury SUVs or other du jour status symbols for our bureaucrats and elite class. These fuel-guzzling, inefficient, SUVs not only consume tonnes of imported fuel, they are also responsible for increased emissions and particulate matter that result in smog.

Islamabad Capital Territory (ICT) administration needs to impose fines on automakers and increase token fees for car owners, whose cars fail to meet average fuel economy requirements of at least 15km/ltr – not to mention a carbon tax for not meeting CO2 standards. These taxes can also be linked to the actual annual usage or mileage of a car. Similarly, higher taxes on hi-octane fuel need to be imposed and cars with over 1500CC engine capacity should be allowed to purchase only the premium higher-octane fuel instead of the regular one. Taxes on hi-octane can also provide funds for limited subsidies on regular fuel. In a business case, where 50% of the fuel import is used by the transport sector, these policy options are now inevitable.

What ICT administration and Capital Development Authority (CDA) should not do is to invest in new highways – these only provide short-term relief to motorists and all benefits vanish due to ‘induced demand’ in the long-run – thanks to the infamous Downs-Thomson paradox. Moreover, all city bypasses and circular roads should be protected so as to prevent new settlements from being established near them – something that happened to the old Islamabad Highway bypass (now Expressway).

Likewise, when it comes to fuel imports in respect of power generation, a massive policy shift is required. Despite commitments to the Sustainable Development Goals, the only way we can have cheap electricity in the future is by shifting our baseload to local coal-based power plants. During the daytime, solar can help too. Besides the PV based solar panels, we need solar concentrator power plants in places near Karachi that not only generate cheap power, but can also give us clean water as a by-product.

This complete shift to coal, nuclear and solar will help the government eliminate international oil shocks to the power sector and will bring stability in our tariffs as well. Capacity payments to independent power plants (IPPs) need to be indirectly phased out via the imposition of super tax on those plants running on crude oil.

What we truly needed to spur industrial growth and resolve our circular debt problem, however, is the idea of distributed energy networks, local tariffs, and newer behavioural policy tools. For example, if line losses in a particular grid of Islamabad Electric Supply Company (IESCO) are almost zero, then its tariff should be marginally reduced and places where line losses are high, only tariff in respect of those regions should be increased.

Similarly, our utility bills (electricity/gas) should also include a summary of bills paid by neighbours – with statistics such as max/min bill paid by anyone in the whole street. This will promote a competition of savings and will highlight people who are engaged in malpractices. An AI-based system can then highlight the potential culprits so that law-enforcement agencies can act against them to avoid theft and losses in distribution.

In a nutshell, rigorous policy reforms to tackle the increasing crude oil consumption are needed as across-the-board subsidies of any sort lead to a vicious circle of even wider deficits. Any subsidy for a particular income group must be funded by taxes levied on other income groups for the economics to be viable. A public policy that tends to leverage the prevalent behavioural biases to address social, economic, and environmental problems is the best way forward.

THE WRITER IS A CAMBRIDGE GRADUATE AND IS WORKING AS A STRATEGY CONSULTANT

 

Published in The Express Tribune, February 13^th, 2023.

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