Only last year when everyone was worried about the current account deficit, the Policy Research Institute of Market Economy noted that the root of the problem lay within the fiscal deficit and not the import of luxury items as usually blamed.
Hardly 10% of Pakistan’s imports can be considered non-essential from a public perspective.
At present, several scholars have come to agree that the fiscal deficit is exerting pressure on the current account. It was never the entire economy of the country, which was running out of dollars, it was just the government. And why would the government of Pakistan need dollars, you may ask?
Everyone likes to blame the economic pressure on the government on military spending or high interest payments on external debt. But the real answer is Pakistan State Oil (PSO). PSO is going bankrupt. It does not have money to import oil.
On March 21, the Economic Coordination Committee (ECC) of the cabinet approved a grant of $100 million to help PSO through its financial crunch. This was in response to a formal “SOS call” after a technical default.
The grant is meant to abate the repercussions, but for how long? A few days prior to this, PSO had asked the Finance Division to introduce a new petroleum levy of Rs10 per litre to help it through the financial mess.
In addition, in order to enable PSO to remain afloat in its payment obligations to LNG suppliers and to continue the LNG supply chain, the ECC has allowed a sovereign guarantee in favour of SNGPL for commercial borrowing of Rs50 billion on an immediate basis.
PSO’s receivables have now reached the level of Rs762 billion since June 30, 2022. Receivables from SNGPL currently stand at Rs494 billion.
SNGPL is another state-owned enterprise which has failed to function sustainably despite timely payments by its residential, commercial and industrial consumers. This is despite the fact that when the government must prioritise the opening of LCs, PSO comes first and then everyone else. It all falls upon the consumer, as usual.
PSO had a monopoly over oil imports all the way from 1974 till 2000. Since then, from a share of 100% of imports, PSO now imports approximately 65% of the total.
Its share in consumer markets has been constantly falling despite having the largest marketing and distribution network in the industry.
So what happens when I want to buy oil? I go to someone who has it. Where do they get their oil from? They buy it in the international oil market using their own dollar reserves.
So what happens when I want to buy oil in Pakistan? I go to someone who has it 65% of the time, that someone will be PSO.
PSO imports oil using dollars from the government of Pakistan. And then we are surprised when the government runs out of dollars. Despite reducing the current account deficit by banning or discouraging most types of imports, the country is still at risk of default.
There is more to it. Oil is the government’s leading source of indigenous revenue. This is basically how the government converts a portion of its foreign exchange reserves into tax revenues in PKR. What happens here?
While this may not be corruption in the traditional sense, it signals that the rules governing this industry have become corrupted. The state and state-run corporations are running a mutually rewarding scheme at the cost of general welfare.
The public sector is a bottomless pit, as it can consume all resources put into it. We must understand that organisations without a profit motive will never be geared towards efficiency, and they will always waste their money.
If there is excess cash, the government will hire temporary employees that the court will never allow to become redundant. If there is a large amount of time to perform a simple task, the government will increase the complexity of the task to fill the time.
Governments with so much involvement in economics would go bankrupt from sustainability issues.
You see, Pakistan’s biggest threat from default has nothing to do with us running out of food. We grow basic food crops which can help us sustain ourselves on our own.
But if we can’t import oil, we won’t be able to run our transportation, industrial, energy or household sectors. The whole economy will come to a grinding halt. And we would have to say goodbye to our modern way of living.
We would still survive, but the point is, is this any way to live? And more importantly, is this any way to run a government?
The writers are affiliated with Policy Research Institute of Market Economy (PRIME), an independent economic think tank
Published in The Express Tribune, April 4th, 2023.
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