A word of caution

EDITORIAL: Former Secretary Power Division, Irfan Ali, in a letter to his successor has appraised the performance of the power sector during the past two years. He has written that the power sector improved recoveries (up to 90 percent till February 2020) and reduced line losses (theft), claims that were shared with the International Monetary Fund (IMF) team, which led to an agreement to cap the circular debt based on three assumptions: (i) regular quarterly adjustments, (ii) fuel price adjustments and (iii) budgeting of subsidies. Unfortunately, however, these assumptions were unmet as the government disallowed any further increase in quarterly adjustments or monthly fuel adjustment post Covid-19 while recoveries during the onslaught of the pandemic were reduced to 40 to 50 percent. Ali has argued that the rise in electricity cost was due to 'major devaluation of the rupee that had an overriding impact on the capacity costs as well as cost of fuel'. He has further contended that the real reason for the tariff hike is not inefficiencies or losses but 'the policy of a sudden and steep devaluation'.

The contribution of the rupee depreciation last fiscal year ostensibly under the IMF condition to adopt a market-determined exchange rate was targeted to "help the functioning of the financial sector and contribute to a better resource allocation in the economy" - objectives that remain unmet. Could the reason be an undervalued rupee? The State Bank of Pakistan (SBP) insists that the real effective exchange rate (REER) cannot be determined from the table on nominal and REER uploaded on its website by arguing that "the extent of exchange rate under/over valuation is computed through a medium-term analysis using sustainable norms for the current account balance, fiscal balance, demographic condition, debt, etc." It is unclear when the SBP would consider it appropriate to undertake a medium-term analysis; however, till such a time as it does engage in this exercise the fact remains that the June REER gives a rate of 93.01 while in May it is 97.19 begging an answer from the Bank to the question as to why this sudden significant decline during a month when the government claimed that the impact of Covid-19 was on the wane.

However, what is disturbing about Ali's letter is his claim that the government did not support the Power Division's insistence to ensure that subsidies be budgeted and disbursed to protect those consumers using up to 300 units per month, even though the IMF team was ready and willing to listen. This is not the first time that a relevant top official has pointed out the government's reluctance to protect those deserving of state protection by the economic team leaders in negotiations with the IMF under the ongoing 6 billion dollar thirtynine-month Extended Fund Facility programme.

The then finance secretary Younus Dagha was also summarily dismissed from the negotiating team during the end April-May 2019 negotiations between the IMF and the government for reportedly pointing out that the 5.5 trillion rupee target set for the Federal Board of Revenue (FBR) in one year was simply unrealistic especially in light of the projected 1.5 percent growth rate. It is relevant to note that while the Dr Hafeez Sheikh-led Finance Ministry accepted the IMF's growth projection in June 2019 yet in the budget documents for the current fiscal year the budgeted projection is shown at 2.54 percent higher - 0.9 percent higher than it had budgeted last year.

Be that as it may, actual collections till February 2020 proved Dagha's concerns as realistic; however, the onslaught of Covid-19 allowed the government to put the entire blame for failure to meet the FBR target on to the pandemic. It is therefore hoped that in future the government's negotiating team leaders consider the suggestions/recommendations made by senior civil service personnel who have considerably greater experience and knowledge of the Pakistan economy than those that come and go with change in government.

Copyright Business Recorder, 2020