Energy/fiscal policy: It’s going to get done quietly
Finance Minister Abdul Hafeez Shaikh is racing against a clock. He knows that he has before the announcement of next year’s federal budget to fix the power crisis or else risk causing even more crippling damage to the nation’s energy infrastructure. The team at the finance ministry, however, appears to have come up with a plan, and not a bad one at that.
Though he was still a merchant banker at the time, Shaikh must have seen how the administration of former president Pervez Musharraf, after running an exceptionally tight ship when it came to fiscal responsibility, lost the plot entirely when election time came around – promising utterly unaffordable subsidies at a time of skyrocketing global commodity prices, running up the deficit and paying for it by simply printing more money, causing skyrocketing inflation.
Shaikh knows that as bad as Musharraf’s last year was, the Gilani administration – being a democratically elected left-wing government — is going to be even worse. He needs to lock in fiscal discipline now, before the calls for the poorly defined, yet frightfully expensive concept of ‘relief’ start flowing in from the simpletons in the media and even some of his own cabinet colleagues.
Energy subsidies equal between one-half and one-third of the budget deficit. If there were no subsidies, the government would be able to meet its budget deficit targets.
But in election season, the politicians from all sides of the aisle will start screaming for even more energy subsidies than the government currently spends now. And the minister can kiss all chances of restricting the budget deficit goodbye.
And so, the few people in the finance ministry who are committed to long-term planning have come up with a plan as simple as it is devious.
It goes something like this: first get the government, including the prime minister, to acknowledge the energy sector’s financial crisis (caused by the government’s inability to pay the subsidies it promises) as the primary problem. Secondly, propose a solution, including clearing the entire backlog of inter-corporate circular debt in the energy sector to get the power companies and refineries to start producing again at full capacity.
Thirdly — and this is the crucial part — do so by getting an international donor to finance the solution who will demand that the long-term problem (unaffordable subsidies and poor government management) be solved up front.
This is why the government is seeking financing for a solution to the circular debt problem from the Asian Development Bank. The ADB appears to even be amenable to a solution, willing to exchange all outstanding liabilities that the energy companies owe each other for cash. The Manila-based lender, however, is likely to demand a complete privatisation of the power distribution companies (eight of the nine in the country are state-owned) and an end to subsidies.
The populists — which include parties as diverse as the old leftists of the Pakistan Peoples Party and the young, naive crowd of the Pakistan Tehrik-i-Insaaf — are likely to scream that this is tantamount to giving up national sovereignty. In truth, it is.
But in fairness, the finance minister tried to persuade the country to do the right thing for its own sake without having to get a foreign lender to force us and the nation — through its elected representatives and the voice of the media — outright refused. Now Shaikh has to do it the hard way.
A lot can still go wrong, of course. The prime minister and the president may not get on board with the finance ministry’s solution (the petroleum ministry seems to be allied with the finance ministry but the water and power ministry seems opposed).
But one hopes that the finance minister succeeds in his plan. If he does not, the rupee is likely to plunge by close to 30% against the dollar in 2013 and inflation and interest rates are likely to flirt with 25%. How do I know this? Because the country made the same mistake in 2007 and paid for it that way in 2008.
Published in The Express Tribune, September 3rd, 2011.
COMMENTS (17)
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@abdussamad: " What do you mean by “required use of NADRA”? Are you asking the govt. to require the businesses to ask for CNIC numbers when selling goods?!! This would never work!...It is against market principles'.
In US, you cannot do any major transaction without quoting the social security number. In India at least for stock market transactions you have to quote your PAN number which is the tax ID. If laws are tough and any property not associated with CNIC can be declared benaami and forefeited, people would be forced to do this. Pakistan has an advantage over India that every citizen has an ID. Why not use this infrastructure to improve revenue collection?
Also there is nothing against market principles in getting people to correctly identify themselves.
in a country where wages are not index-linked, the moral component of your argument for raising power tariffs is well....not going to be well-received....as for privatising things....KESC's privatized...hasn't made much of a difference, the hope is that the private sector that comes in actually wants a stake in the economic development of the country.
and btw......if the PPP is 'left-wing' I'd be damned...given the collection of pirs, faqirs (TM Manzoor Wassan), and other sajjadanasheens....its barely centrist...
good piece though
there are places in islamabad where there is no water for three days in our village in quetta no electricity for 14 hours democracy is the best revenge
@abdussamad: I am not suggesting the CNIC number for all transactions - just high value financial transactions like real estate , jewellery, stock market.
I am not suggesting that for buying pyaaz tamatar
As much as I agree with your point Mr. Tirmizi, there is one more thing to this. If people stop stealing electricity across the country then;
1) others don't have to subsidize it for them 2) you should have enough cash flowing in to solve at least some problems.
So this bashing kesc and what essentially draws down to 'kundi culture', which has to go and consumers have to realize this is not funny at all. It gives rise to so many other problems.
Government is rationing fuel. The crisis is government made since they have no money, they can print money and rob Pakistanis but they cannot do the same to buy fuel.
All the politicians, bureaucrats and economists should be huddled in the middle and surrounded by armed forces generals as a circular firing squad and shot.
@gp65: What do you mean by "required use of NADRA"? Are you asking the govt. to require the businesses to ask for CNIC numbers when selling goods?!! This would never work! Take the example of exchange companies. They are required to ask for your CNIC number but they never do. It's just not in their interest to do so. They'd rather risk a hefty fine from the SBP than ask customers for this info because customers don't want to give this information and it cuts down on their sales. So it'll never work if you expand it to the other businesses. More so it would be completely against free market principles.
I think the size of the government needs to be reduced inline with its actual revenues. The Pakistani government is inefficient and corrupt so it's better if people don't pay taxes. Better if people spend that money themselves. Remember, its the Edhi foundation that runs the largest ambulance network in Pakistan not the govt. And look at how efficiently it does that with the voluntary contributions of the people of Pakistan.
There is one flaw in the logic. The assumption here is that once a loan from ADB has been taken, the politicians will be forced to comply with the terms and in this way fiscal profligacy will be avoided.
But look at history - how often did Pakistan adhere to the terms laid out by IMF - ft he 11 times that Pakistan has been in an IMF program? What happened to the most recent IMF program - did the government not backpedal on petrol price rise in January even though there was IMF conditionality that needed to be complied with? What happened to RGST - which was also part of the IMF conditionality?
OF course the fiscal situation needs to be addressed but there are no short cuts. On the revenue side, a couple of things would help - required use of NADRA for any significant financial transactions whether in real estate or stock market or jewellery and good analysis of associated data will allow the broadening of the tax net for income tax - reducing loopholes in corporate taxation (where votebank politics will have minimal impact) - appropriate use of computerised information to reduce evasion. On the expense side, the folowing steps could help - moving to a regime of conditional cash transfer for subsidies to target subsidies and reduce leakage (several Latin American countries have already done that and India has started in this direction but Pakistan has an advantage that all Pakistanis already have a unique national ID while it is just being rolled out in India now. - the defence expense needs to be ratioanlised. That is the big elephant in the room and takes up between 35-40% of revenue collected and HAS to be addressed.
Touch decisions require leadership - something that Pakistan hasn't had in some time.
Short term pain for long term gain.
FM is just allowing the economy to drift and slife
What happened to RGST and VAT?
And what happened to all the aid that was to come from :"Friends of Democratic Pakistan"
@abdussamad: I guess he means to point out about our debt servicing starting from end 2012 - early 2013 which will dramatically lower foreign reserves. Government would have to print money which may fuel inflation etc.
Circular Debt is probably the biggest issue forcing the government to pay billions in subsidies - an out dated practice - with no increase in efficiency.
However, one should explore alternatives before reaching out to the Asian Development Bank as their conditions may be prohibitively "expensive" for the country. Secondly, with a weak state BUT a strong civil society with basic economic structure still intact, I do not believe that Pakistan needs to look beyond her borders for help. I have a few ideas!
Increase/reform in tax revenues: Agriculture, services and wealth. This will lower fiscal deficit and allow the government to attend to, if not cure, the cancer of circular debt. This will facilitate full capacity energy supply eventually resulting in increased production, lower unemployment, increased aggregate income hence further increasing revenues so on and so forth....
Trust the Pakistani Society: Continuing from my first point, second, Inefficient taxing mechanisms have facilitated skewed allocation of resources. Having lived in Karachi for the past so many months, I have noticed a huge number of Industrialists/businessman/traders etc who, though make a lot of profits, do not pay as much tax that in turn increases their net-worth but doesn't help in forming a strong state. I think "trusting" a private-sector-backed recovery is something the Government should consider (It is something the Conservatives have recently done in the United Kingdom). A reduction in government spending, coupled with a reduction in interest rates, would undoubtedly encourage investment by the private sector. This may well substitute public debt with private debt but that is common practice globally and does not hurt..
If I had any influence on our finance ministry I would have suggested they implement both strategies keeping in mind that shifting public debt to private works best with an efficient tax regime.
Arsalan Nazim from Karachi.
We have $17 billion in reserves and increasing remittances and export earnings. So how does the author expect the rupee to depreciate so much in 2 years? Maybe if he had provided some reasons for that statement it might make sense. Instead we have what sounds like a prediction pulled out of thin air!
I have never read such an excellently written article on the core of our economic issues in the Pakistani print and web media. Wonderful. I am a keen student of economics and am depressed at the utter level of economic mismanagement in our country. Pakistan has the potential to rise as a serious economic power but our lack of leadership is failing us. In my view, the record of economic management of military dictators in our history is far better than those of the civilian leadership.
This is a good write-up.
However I don't know why external financing from the AsDB raises questions of 'sovereignty'.
This year is shaping up like 2008 and we seem to be making the same mistakes. That however is nothing new.
The solution is more investment in renewable energy . we need to scrap Benazir Income crap for the renewable projects of wind and tidal
30% is on the lower side experts say 40 to 45 % by 2013 time to stock gold which is the best bet now.