Following are excerpts on fiscal matters from BR Research's recent sit-down in Islamabad with Asad Umar, a former Engro CEO and currently an elected MNA and top leader associated with the Pakistan Tehreek-e-Insaf.
BR Research: How can we judge the quality of government spending when actual spending is shrouded in mystery?
Asad Umar: You raise an important point. For the past six years in particular, the government figures for fiscal deficit have not been achieved. Similarly, there is lower spending on development compared to the budget--and there are massive variations there. Is there any point then in delivering budget speeches? Twenty-four SROs with a cumulative impact of Rs 238 billion were issued last year alone. Electricity price increases were never mentioned anywhere in the budget, nor were renewal of tax exemption schemes. These are massive budgetary decisions, big numbers, which are no longer part of the budget document. I am not talking about the quality of the decisions here; I am only referring to the meaningfulness of the budgetary exercise.
BRR: Has your position evolved on the power tariff rationalisation issue? Your post-budget response in the parliament seemed to suggest you are now against it.
AU: Our position has been the same. But sequence is critical to reform. There was a time in the '90s when the government of Pakistan used to borrow from the SBP on tap for 6.5 percent. And inflation in Pakistan, for decades, has averaged around 9-10 percent. So they were borrowing at a steep negative interest rate, which was a bad thing that needed to be changed. Later realising that the rate should be determined by the market, they made that change without fixing their fiscal problems first or setting up a liquid debt market in the country. Suddenly T-bills' rate shot up to 17.5 percent in mid-'90s. That made the government fall into deep debt, frantically print currency notes.
So, sequence has to be right. We don't change out positions based on politics. PML-N issued its energy policy in August last year. I went on air and said that this policy is in the right direction. There was only one thing I critiqued: they were doing the wrong sequence of reforms. They front-ended tariff increases. Look at our document and it clearly shows how, over time, losses can be brought down to zero and load shedding eliminated.
BRR: So you are saying that decrease in power subsidy is the wrong way to start power sector reforms?
AU: I won't use the word 'subsidy'--that's a false definition; because the economic value of electricity in Pakistan is between 10 and 11 rupees per unit right now. The rest is corruption and incompetence. You cannot charge that premium to consumers or pass on inefficiencies to them.
Through front-ending tariff increases, export sector has been made more uncompetitive. And from an industrial point of view, it is also more difficult for the import-substitution industry to compete. From an individual point of view, it is a moral issue. They are doing it just wrong. While consumers pay the price of inefficiencies, what about the guys who created this mess? How many people have been prosecuted? How many are in jail? The answer is zip. Those who inflicted this cost got away scot-free and the rest of the country pay the price. This, in economic terms, is called creating a moral hazard.
You also need to look at this issue through a practical point of view. When you jack up tariffs, problems of thefts and pilferages increase. Daily cost of such losses was billion rupees a day around the time elections were taking place last year. After the government took over, there has now been 78 percent price hike amid claims of governance by an experienced team. What is the result? Those losses are still a billion rupees a day. Receivables have gone up; technical losses have increased.
BRR: How much time will your energy sector plan take?
AU: Four years-if we do all the right things. The details are available online. We convinced Imran Khan not to play as populist on this issue, to avoid making claims of premature resolution. He has remarkably stuck to that courageous position. It is possible that we may not deliver on that timeline, but we will never say something which we believe can't be done.
BRR: What priorities does the latest Khyber-Pakhtunkhwa (KP) budget reflect?
AU: We are focused on raising 75 percent additional revenues in FY15 compared to the previous budget. Specific measures include agriculture tax increases of 200-400 percent for medium- to large-sized landholders and orchard owners. There is an agriculture tax increase of 400 percent for the largest farmers. GST on provincial services has been cut from 16 percent to 15 percent. We have added five new services to the tax regime where the GST has been fixed at a lower, 10 percent. We plan to bring the rest of GST on services down to 10 percent as well in a few years.
On the expenditure side, the single biggest increase is for education, followed by police, due to security issues facing the province. Among social welfare measures, the KP government will provide to BISP-eligible families Rs 10per Kg subsidy on flour, and Rs 40per liter subsidy on cooking oil. So, there is social welfare, education, tax on large farmers, cut in GST--we try and do what we believe is right. We are doing at the provincial level what we advocate for the Federal Government.
BRR: Last year (FY14), the KP government had budgeted Rs 24 million in agriculture taxes--this year, it has budgeted Rs 79 million under this head. Are you satisfied with that? Also, why is indirect taxation increasing in the province's budget when in fact the government's focus should be on direct taxation?
AU: I am not satisfied with the agriculture tax target. But we also need to realise that agriculture is small part of KP's economy. However, if we do the right things, we can take the provincial agriculture tax collections to Rs 300-400 million in two to three years, which is what our plan is. That's obviously lower than Punjab's annual agriculture tax collections, but Punjab has a huge agro-base.
The indirect tax increase situation is prevalent across the provinces, so that's not something unique to the KP province. This had to happen after the devolution as provinces had to deal with a completely new system. Direct tax collections have just started and at least three years are needed to tilt the ratio towards direct tax collections.
BRR: At the provincial level what in your view are the reforms--and sequencing of reforms, to take your term-that will be necessary to make them active producers in the oil, gas and power sector?
AU: KP has tremendous potential for power generation. Under the existing schemes of things, for injecting electricity into the NTDC grid, KP would get only 11 percent of it back. This shows that there is no incentive for the KP government to do anything substantial on power generation. The whole country will win if you are able to have a more direct incentive for KP to use more of its power generation.
Our proposal was for the Federal Government to give us the generation and distribution business and pay for four years of transition losses and then we would take it over. The Federal Government did not agree to this and only offered us PESCO ownership. The KP Chief Minister had a follow up letter written to the Prime Minister but no encouraging response has come. It has been six months so far.
Bottom line is that provinces have to be incentivised to take ownership of the resources. The whole country will benefit. If you allow a province to take 50 percent of the gas that comes out of it, suddenly there is so much more incentive to really put the foot on accelerator. But, sadly, the Eighteenth Amendment spirit is not being followed. Look at the GIDC law that was passed. It is a shameful law, an absolute violation of the Constitution.
BRR: Can these issues be addressed in the next NFC?
AU: We can fix these issues through NFC. But that will take a long time. These are snap decisions. If it is something that is considered important by all major political forces, we will get it done.
BRR: Still, what should the next NFC focus on in your opinion?
AU: I think the main focus now has to be on these resources and the sharing of benefits of these resources. In, strictly my personal view, I don't think there is much room left in the federal balance sheet for an increase in federal transfers. If there is, then it should be contingent. That is, link higher federal transfers to incremental provincial tax revenues--or make it part of the equation.
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