EDITORIAL: The federal caretaker cabinet meeting last Tuesday, reportedly (as no press release was issued or a press briefing held by any member of the cabinet) decided to consult the International Monetary Fund before providing relief on the hiked up August electricity bills that are a key condition of the 29 June staff-level agreement on the nine-month 3 billion dollar Stand-By Arrangement (SBA).
This deferral to the IMF is raises serious questions about the dithering by the caretaker government to create leverage within three well defined parameters of the SBA identified in the Memorandum of Economic and Financial Policies (MEFP).
First, current expenditure was raised by a whopping 53 percent in the current year from the budgeted amount in 2022-23 and 26.5 percent from the revised estimates of last year and while the bulk of this raise is in the markup payments due to the heavy reliance on borrowing to meet the budget deficit - 84.9 percent higher than what was budgeted last year and 32 percent higher than the revised estimates - yet one would have hoped that a technocrat dominated government carefully selected by the stakeholders would have exercised the forethought to prioritise negotiations with domestic stakeholders before deferring decisions to the IMF.
The MEFP specifically notes the intent of the authorities to contain spending including the public wage bill and pensions to below inflation levels. Given that the outgoing government awarded a 30 to 35 percent raise in wages to public sector employees, well above the inflation rate of 28.3 percent in July, the focus must now be on slashing civilian and military procurement expenditure for starters in the current fiscal year and to cap it for the next two years at least.
Secondly, elected, military and caretaker administrations have all focused on raising revenue as a means to meet/appease multilaterals’/bilaterals’ legitimate demand to achieve full cost recovery and keep the budget deficit at a sustainable level. And it is this element of the SBA that clearly was the focus of Tuesday’s cabinet meeting as the decision to provide relief to electricity consumers many of whom at present are angrily taking to the streets in several cities was deferred to the IMF.
Two observations are in order: (i) why was the politically challenging condition of ending free electricity for all current recipients, debated on Sunday at the emergent caretaker cabinet meeting, not announced and subsequently notified as it had an element of equity; (ii) MEFP referred to boosting revenue by 254 billion rupees from the 9.2 trillion rupees budgeted by the previous finance minister.
Given the penchant to rely on ease of collection or on the low-hanging fruit by the Federal Board of Revenue (FBR), each electricity bill charges 17 percent as general sales tax and 7.5 percent advance tax (as well as the recent levy of 35 rupees to fund Pakistan Television).
The government can end sales tax on bills immediately and either generate more revenue from widening the tax net, as per a long-standing IMF demand, particularly on traders and rich famers, and/or reduce expenditure.
To sort out the tax delinquents of high nuisance value such as but not limited to traders and retailers, the forum of SIFC (Special Investment Facilitation Council) should have been and now, must be energized.
And finally, the MEFP notes the government pledge not to introduce fuel subsidy or cross subsidy scheme in the current fiscal year and beyond, however, subsidies must be channeled through the Benazir Income Support Programme and that remains pending.
In addition, structural reforms in the energy and tax sectors have assumed a level of criticality not seen before as the general public’s capacity to accept rising costs associated with weak infrastructure and poor governance have eroded well beyond the realm of affordability.
Weak infrastructure and poor governance are additional constraints facing the Pakistan economy, so stated Moody’s Investors Services on last Tuesday.
While these two constraints have faced Pakistan since its creation in 1947, irrespective of whether a civilian or a military government was in power, their economic fallout has been dealt with through a steady rise in tariffs (passing on the buck to the consumers) and increasing reliance on indirect taxes whose incidence on the poor is greater than on the rich. This has seriously compromised the capacity of all households to meet their kitchen budgets, other than the rich and state employees who have been awarded pay raises commensurate to the rate of inflation.
As matters stand today, increasing numbers from the middle class are slipping into the lower class and the caretakers need to ensure that these people do not further fall below the subsistence line into the poor class.
The caretaker government must move swiftly to deal with the current crisis that needs to be addressed immediately because with the expected rise in the prices of petroleum and products (to be announced today) - items which are also heavily taxed with a levy of 55 rupees per litre on high speed diesel and 50 rupees per litre on petrol - the cauldron of public discontent may well sweep the caretakers in its wake.
Copyright Business Recorder, 2023
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