EDITORIAL: The two regulators, National Electricity Power Regulatory Authority (Nepra) and Oil and Gas Regulatory Authority (Ogra), have approved raising electricity and gas rates yet again – Nepra by 3.07 rupees per unit under fuel charges adjustment (with the regulator’s recent finding that all distribution companies overcharged and overbilled consumers by 100 percent with even protected consumers, using less than 200 kWh per month, consistently charged the rate of upper slab users) and Sui Northern Gas Pipeline Limited by 137 percent, over and above the gas rate rise effective from 1 November for all consumer categories with protected consumer charges raised from 10 rupees to 400 rupees, a 3900 percent raise at one go.
While these price upgrades are no doubt a component of the agreed conditions under ongoing multilateral programmes, including the ongoing nine-month 3 billion dollar Stand-By Arrangement of the International Monetary Fund (IMF), with the economically viable objective being full cost recovery.
Yet, what is relevant to note that price upgrades have been the preferred policy decisions of all administrations, civilian and military alike, instead of implementing structural reforms that would reduce sector inefficiencies and thereby the need to pass on the entire onus on to the hapless consumers.
It is relevant to note that while the capacity of the general public to pay the price of full cost recovery was minimised through subsidies in the past, however, the country has reached a point whereby no multilateral or bilateral lender is willing to extend loans without implementing structural reforms – a cessation with an imminent possibility of default.
At the same time, these recent administrative measures come in the wake of a 29.2 percent consumer price index (CPI) for November 2023 – a consistently high rate that has degraded the capacity of low to middle income earners to meet their basic needs requiring sacrifices that have seriously undermined their quality of life.
In other words, the country has reached a point, where there is no relaxation in terms of the country’s lenders, and at the same time, no room in terms of the capacity of the general public to meet the rising cost of utilities.
What is a source of serious concern is the fact that the IMF in the ongoing programme, as in the previous Extended Fund Facility programme approved in July 2019, is insisting on linking the policy rate with the CPI, on the assumption that headline inflation, which includes imported inflation, can thus be better adjusted rather than by linking the policy rate to core inflation (non-food and non-energy) as was the previous practice.
This assumption by the Fund is patently wrong for Pakistan for two reasons: (i) unlike in the developed economies of the West, the policy rate in Pakistan has little if any effect on the general public because their borrowing is severely limited due to lack of collateral or a guarantor.
In addition, the concept of a mortgage is almost non-existent; and (ii) the two main borrowers from the banking sector in Pakistan are large-scale manufacturing sector and the government itself; therefore, any increase in the policy rate raises input costs that, in turn, has a direct negative bearing on productivity and the growth rate and with the government borrowing heavily domestically, this has implied ever-rising debt servicing costs.
The November 2023 Update, released by the Finance Division, noted, “mark-up payments experienced a substantial surge of 44.6 percent, primarily attributable to a higher policy rate.”
Since 2019, no finance minister (seven since then, including the incumbent caretaker) or Governor State Bank of Pakistan (three including the Acting Governor in 2022) has been able to convince the IMF to abandon the linkage between the headline inflation and policy rate as it is simply not relevant in Pakistan’s case.
One can only hope that the IMF staff takes cognizance of this fact and makes appropriate adjustments or else the ongoing inflationary pressures may well lead to pervasive civil unrest and push the economy further into a recession that would make the implementation of the necessary structural reforms all the more challenging from a political perspective.
Copyright Business Recorder, 2023