Whats on Nawazs platter?

Nawaz Sharif made history yesterday by taking charge of the country for the third time. Investors and businesses are expecting the seasoned politician to spur economic activities by channeling the right policies. The foremost challenge for him is to resolve energy problems and slash the fiscal deficit to straighten the jolting macroeconomic fundamentals.
The upcoming budget is going to set the tone for Sharif and his team. And none other than energy related subsidies are eating over two percent of GDP, in terms of inter tariff differential subsidies. This means that an upward adjustment of Rs6 per unit is required to plug the gap.
Half of this is approved by Nepra and can be done in the upcoming fiscal year. However, politically, PML-N would like to wait till winters for such an adjustment, since in the winters both the consumption and load-shedding are off-peak, allowing consumers to gradually adjust to the load.
The immediate challenge is to slash structural deficit contributing from the circular debt that again is close to one percent of GDP (Rs250bn on net basis), and by clearing this debt many IPPs may start using optimal capacity. That can substantially reduce the energy shortfall. For this purpose, the government is eying to issue Rs500 billion worth of government papers. The flipside to that is debt issuance will not only increase the debt servicing cost but also trigger the second round of inflation.
This money may increase the M2 growth by 50 percent which can cascades to high inflation with a lagged affect. This option may be enticing for Ishaq Dar, the likely finance minister. With inflation as low as five percent, expansion in money supply may not trigger the panic button. Plus, its the best time to slash interest rates in the upcoming monetary policy to curtail debt servicing cost.
Nonetheless, repercussion of printing money is going to be on inflation. To add to the ado, the devil of circular debt would appear again without full rationalization of tariffs. To avert this vicious cycle, empowering the DISCOS is imperative. But its easier said than done. Its easy to privatize or corporatise the DISCOS in Punjab since losses there are already in permissible limit.
The issue will be to plug-in leakages in places like Quetta, Hyderabad, Fata and notorious areas in Karachi. But for a Punjab dominating government taking harsh steps in other provinces can trigger regional violence, whereas Nawaz, in yesterdays speech, was categorical in improving ties amongst the provinces.
Hence, the resolution of energy catastrophe is partially linked to the law and order. Improving the latter is essential for both domestic and foreign investment to flow in. Mind you, investment-to-GDP ratio is at its lowest ebb, and is imperative to increase this ratio to churn out economic activities and generating employment.
The losses to war ridden economy are to be dealt with great care. That includes negotiation with Taliban while keeping US Interests aligned; put an end to tug-of-war in Karachi by keeping MQM, ANP and PPP on board; and to put reigns on sectarian violence and missing-persons issues in Balochistan. Whether Nawaz Sharif has become politically matured to comprehend the gravity of issues and attempt to cast a delicate balance remains to be seen.
In such a dicey environment, the most viable option for PML-N to curtail fiscal deficit and to spur investment is to privatise the eight bleeding public sector entities. It can be done one by one, and is relatively easier to find investors for buying PIA, PSM and others. Even if they are sold for Re1 each, the buyer may bring investment to mend these entities.
These measures will give the right signal to other investors. Lately giant entrepreneurs of Punjab are very close to Raiwind policy think tanks. So the chances for some executable plans to be spelled out in budget and post budget deliberations are high.