EDITORIAL: Prime Minister Imran Khan has publicly acknowledged that his team was not prepared to deal with the multiple crises that it inherited, due to not only flawed policies of his predecessors but also because of a lack of available data; however, one would hope that as his administration reaches the midway point in its tenure in January 2021 all the issues that persist in the economy in general and specific sectors in particular have not only been identified but, more importantly, recommendations to deal with the crises have begun to be implemented.
On 12 May 2019, the economic team leaders – Dr Hafeez Sheikh and Dr Reza Baqir - signed off on an agreement with the International Monetary Fund (IMF) staff for a 6 billion dollar programme loan that identified all existing, albeit very daunting, macroeconomic issues and laid out time-bound measures, including one-time actions and specific structural adjustments. That these measures had to be put on the back-burner by Pakistan as it began to grapple with the effects of the pandemic is the rationale provided by the economic team leaders for not being able to meet several programme targets – a claim that is disputed by independent economists given the fact that the severe contractionary monetary and fiscal policies that had to be agreed envisaged a growth of no more than 1.5 percent by the IMF and the budget 2019-20 – a rate that made a mockery of attempting to generate foreign exchange reserves from a trade surplus, accounting for a steady rise in reliance on external borrowing (including swap arrangements with China and commercial banks) and debt equity, and a tax revenue target of 5.5 trillion rupees.
Pakistan is currently on the 23rd IMF programme and ironically during the past two to three decades the two sectors that have continued to be a source of drain and therefore of serious concern to the multilaterals, including the IMF, are the energy and the tax sectors. While the government has renegotiated the contracts with Independent Power Producers (IPPs) and received general acclaim yet these agreements remain legally non-binding as the government does not have the 40 billion rupees that it agreed to disburse to clear all their past dues. Transmission network remains antiquated with limited capacity to vacate the entire generational capacity that was strengthened during the PML-N government without a concomitant upgrading of the transmission and distribution (T&D) networks with the result that there is serious mismatch between the two contributing to inability to fully utilize the generation capacity and abnormally high T&D losses well above the international average with frequent breakdowns. The sustained poor performance of the sector is evident from the escalation in the circular debt – from 1.2 trillion rupees in August 2018 to 2.3 trillion rupees today, which is a 91.6 percent rise during just two and a half years. What is baffling is that the Prime Minister and his team appear to be accepting the narrative of the two divisions of the Energy Ministry – power and petroleum – in spite of the situation on the ground where shortages and a persistent rise in rates is the price that the general public is paying for the continued mismanagement.
The tax sector too is a source of concern as the tax structure remains unfair (with sustained reliance on sales tax whose incidence on the poor is greater than on the rich and an all encompassing withholding tax in the sales tax mode but crediting to direct tax revenue), inequitable (with the salaried class paying the bulk of income tax as it is cut at source while other income groups with incomes far in excess continue to evade/avoid taxes), and anomalous where by a state-owned entity may be paying much lower tax than a private sector entity which impedes private sector activity regarded by the PTI administration as the engine of growth.
The public sector entities’ (PSEs’) poor performance continues as well compounded by: (i) the European Union has yet to allow PIA to land within its territory; meanwhile the government has extended landing rights to Virgin Atlantic which would undercut PIA business as and when the PIA flights are restored; (ii) the decision to retrench employees of Pakistan Steel Mills – non-operational since 2015; it is an economically sound decision but unwisely implemented during the second wave of the coronavirus; and (iii) Pakistan Railways whose accident record during the current tenure has been much greater than during the previous governments. One would hope that the government revisits the performance of the relevant ministers and reschedules some of these decisions.
Inflation is another area which requires government attention. It is not appropriate to consider lower price of wheat and sugar in recent weeks as an achievement because that has been possible through imports – or at the cost of spending scarce foreign exchange reserves on items whose domestic demand would have been met by domestic supply if their exports had not been allowed by the government. Inflation is also a function of the budget deficit (budgeted at an unrealistic though unsustainably high level of 7 percent in the current year though a more realistic figure would be the same as last year at negative 9.1 percent) and a contractionary monetary policy - high discount rate and today’s 7 percent is above the core inflation of 5 percent - with repercussions on productivity.
One would therefore hope that 2021 would be marked by sectoral and governance improvements based on the lessons learned in the energy sector (with a focus on structural improvements rather than passing on the buck for poor performance on the hapless consumers), revisiting the tax structure, improving PSEs’ performance and reducing inflation not only by focusing attention on hoarders and the mafia (read producers colluding to contain supply to raise prices) but also on the policies by economic team leaders. In some cases improvements can be effected through bold and concerted decisions by the Cabinet but in some instances the mindset needs to change dramatically and may well require a change in manpower – be it at the level of the cabinet or at the level of sector experts.
Copyright Business Recorder, 2021
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