The usual jargon was issued by the Prime Minister’s Office on 27, Sunday, after an inconclusive emergent meeting was called in the aftermath of violent street protests in several cities against the August electricity bills: relevant departments and ministries were directed to prepare concrete measures to reduce the burden of the increased bills and submit them the following day.
The Caretaker Prime Minister was quoted as saying, “we will not take any steps in haste that will harm the country. We will take measures that won’t further burden the national exchequer and will facilitate the consumers….It is not possible that while the people face difficulties high ranked officials and the prime minister continue to consume free electricity paid for with the taxes people pay…I represent the common man even if the air conditioner in my room has to be turned off.” And he sought details of institutions as well as officials getting free electricity.
On 28 August the Caretaker Information Minister tweeted that the Ministry of Energy had chalked out recommendations for consideration to tackle the issue of inflated bills and would present them to the federal cabinet on Tuesday which would take a final decision on the matter.
On 29 August the cabinet meeting reportedly (as no press release was issued and neither did any caretaker cabinet member bother to hold a press conference) deferred the decision to provide any relief till consultations, read phasing out the condition to achieve full cost recovery, were held with the International Monetary Fund (IMF) under the ongoing Stand By Arrangement (SBA), with the staff level agreement reached on 29 June 2023, which helped the country avert the looming threat of a default.
On 1 September a somber-looking caretaker prime minister flanked by the caretaker finance minister and energy minister informed a select group of TV anchors that the bills would have to be paid though a proposal to defer the payment for those who consumed less than a certain amount of electricity has been submitted for consideration to the International Monetary Fund (IMF).
The question is what constitutes full cost recovery? There is overwhelming evidence that the woes of the energy sector are due to the continuation of the same five major flawed policies/failure to implement structural reforms by successive administrations and their compounding over decades’ that accounts for the unsustainable 2.6 trillion-rupees circular debt today.
First, contractual agreements favouring the Independent Power Producers (IPPs) signed during the tenures of Benazir Bhutto, Pervez Musharraf and Nawaz Sharif (under the umbrella of China Pakistan Economic Corridor) which allow for capacity payments in dollars – payments that are increasingly a challenge for the country with a fast eroding external rupee value and plummeting foreign exchange reserves (currently shored up with debt).
The Khan administration successfully negotiated with all IPPs except those established under CPEC – a success that had very limited positive fallout as the gains to the consumers were estimated to be less than 50 paisa per unit over a period of more than twenty years. And a premier intelligence agency was one of the negotiators considered to be a key player in the success of the talks; however, projects established under CPEC were unwilling to renegotiate the terms.
One would hope that a valuable lesson is learned from this experience: qualified lawyers must carefully review contractual obligations with foreign investors or else the cost would be payable by the public along the line.
Second, interest payments are passed on as tariff on past massive borrowing to meet the sector’s liquidity needs, which incidentally also accounts for 73 percent of all outstanding stock of government guarantees that further increases indebtedness with repercussions on associated macroeconomic indicators particularly inflation. Third, transmission and distribution losses well above those allowed by the regulator. Fourth, electricity theft/non-payment.
And finally, free electricity to senior management and employees of the energy sector that as per the Ministry of Energy audit report 2021-22 was extended to 189,00 government employees across the country, with a collective consumption of 34 crore units at an annual cost of 8 billion rupees, projected to rise to 11.5 billion rupees in the current year.
The last Public Accounts Committee Chairman Noor Alam Khan proposed ending this facility for grades 16 to 22 which he claimed would save 9 billion rupees. This is an economically unviable long-standing policy though if withdrawn it would most likely be challenged in the court of law.
Negotiations are critical with those who receive free electricity, before seeking approval of any proposal with the Fund, with the objective of reaching a more economically viable solution. Besides this measure would be endorsed by the IMF even though it is not a condition/structural benchmark under the SBA.
In addition, the Prime Minister’s House, the Presidency, and the Secretariat are billed at the taxpayers’ expense while a generous limit of free electricity is also allocated to houses in the Ministers’ Enclave. These must be withdrawn immediately even though the actual electricity maybe a very small percentage of the total used yet optics are critical at this point.
Two observations are in order. First, while there is no clarity yet as to the specifics of the proposals sent to the IMF for consideration with the Prime Minister merely stating this Thursday past that some relief would be announced within 48 hours (not announced till the writing of this article) yet one would assume that one proposal would be to reduce/end taxes on electricity for those with low consumption - currently levied at the rate of 17 percent general sales tax, and 7.5 percent advance tax - with a proposal to generate the resultant shortfall in revenue from some other source.
If this other source envisages widening the tax net to include the non-filing traders and the income of rich landlords at the same rate that is payable by the salaried class, then the Fund is likely to fully support this measure.
The caretaker finance minister informed the senate standing committee that the government would adhere to the specifics of the SBA and lamented the very narrow fiscal space implying there will be no subsidy or cross subsidy as noted in the SBAs’ Memorandum, of Financial and Economic Policy (MEFP). But sadly, she remained silent on measures that one would have hoped she had announced by now that would have begun to create fiscal space and thereby increase leverage with the Fund notably slashing current expenditure (inexplicably upped by 26 percent in the budget for the current year from the revised estimates of last year).
And secondly, two previous finance ministers unsuccessfully sought renegotiations (phasing-out of harsh upfront conditions) with the IMF under the then ongoing Extended Fund Facility (EFF) programme – Shaukat Tarin and Miftah Ismail – but both were forced to capitulate as the possibility of a default surfaced.
Ishaq Dar not only requested a phasing out of the same conditions which was denied but also violated two major EFF conditions (a controlled interbank rate and raising the budgeted current expenditure by 21 percent for last fiscal year) that led to its suspension with 2.6 billion dollars remaining undisbursed.
The incumbent caretaker finance minister has yet to make a positive impression on the markets, and her insistence that she would adhere to the letter of the SBA is baffling given that as a former long-term employee of a multilateral bank she surely is aware that the spirit (as stipulated in the overall framework of the programme) would provide her with sufficient latitude to tweak policy measures, particularly those contained in the budget, that would create fiscal space and increase her leverage with the Fund.
Copyright Business Recorder, 2023
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