EDITORIAL: The Prime Minister is focused on changing the landscape of government subsidy mechanism into targeted subsidies. These should be for the deserving - starting from the poorest of the poor. And secondly, it should be for wealth creation - mainly for industrialization and especially for exporting sectors. Some steps have already been taken in this direction in the past few months; and a detailed plan of targeted subsidies is yet to be unveiled. The first step is to identify the subsidies and properly count the fiscal sum. The next is to do away with inefficient and untargeted subsidies.
Over the last seven decades, however, numerous natural resources are being wasted - one prime example is of natural gas supply to affluent income groups at lower than market rates while the poor have to make do with relatively expensive alternatives.
Insofar as exports are concerned, there is a mechanism in place since 1973 of providing interest rate subsidy for working capital. Later, long-term financing subsidy was added to it. That subsidy had been misused in various instances and these subsidies continue to-date. Over the past few years, State Bank of Pakistan (SBP) has improved its audit process to deal with the challenge of misuses. Yet, such misuses cannot be ruled out.
There is long history of interest rate distortion on National Savings Schemes. These were unfunded and rich have used it to the fullest. There had been allowance of institutional investors to participate in such schemes, and that had created an arbitrage opportunity for some, especially in volatile days of interest rates. In agriculture, for ages, fertilizer manufacturers enjoyed subsidies on inputs, and not all is passed onto farmers. With lowering fiscal space, direct subsidy towards agriculture inputs is being replaced by higher support prices - for many years, support prices were well above the international prices, making food dearer for non-farm poor in particular. Even within the farming community, the government procurement has mainly remained confined for the big farmers. Then there is commodity operation circular debt building up within these procurement financing. Such subsidies are being provided the by provinces. Then there are energy related subsidies - in the power and gas sectors. There is no need to mention stock and flows of infamous circular debt. The distortion in the energy market has resulted in misallocation of primary energy sources. For example, pipeline gas is best to be used in power plants with higher efficiencies; but due to wrong pricing, such resources are unfortunately being expended on water and food heating in households. And the list goes on.
All these subsidies need to be consolidated and targeted. Today, we are living in an era of technology where the right framework of disbursement is easier to conceive, plan and execute. Consumption-based subsidies should be for the poor and these have to be disbursed using database of Ehsaas programme - be it cash disbursement or subsidies on the utility bills. Soon after the outbreak of Covid-19 in the country, the cash disbursement to millions of households was a remarkable achievement for this government. Such mechanism has to be evolved for the electricity bills as well. It has been learnt that work is in progress and a pilot project is under way in IESCO.
Production-based subsides for wealth creation are gaining traction during the ongoing tenure of the incumbent PTI government. Recent package of providing incremental electricity use at a marginal cost for large manufacturers and at a subsidied rate for SMEs is a manifestation of it. Then there are interest rates subsidies, which became more pronounced in the days of pandemic outbreak. There was time-bound support through deferment of principal amounts of loans. The SBP also introduced a scheme for paying wages which significantly reduced the potential layoffs. The scheme is over, but it has successfully saved numerous jobs in the process.
One of the best schemes offered for creating wealth and enhancing manufacturing production capacity is SBP's TERF (Temporary Economic Refinance Facility). The response the TERF has attracted is very encouraging - to-date Rs193 billion of financing is being approved for 243 projects, although the requests are of Rs437 billion for 425 projects. This scheme appears to be very encouraging; its results will be visible in next 5 to 10 years. It is encouraging to see long-term thinking beyond the election cycle. The incumbent government and country's increasingly autonomous central bank therefore deserve praise.
Copyright Business Recorder, 2020
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