Pakistan appears to be moving inexorably towards yet another winter of discontent with dimensions outpacing previous winters. While in previous years domestic gas supply and demand were upset as winter approached, today the issue is also one of inexplicable delays in import of LNG – an issue evident for the second year running with the Petroleum Division and Oil and Gas Regulatory Authority (Ogra) audit 2020-21 maintaining that delay in floating tenders for import of LNG spot cargoes led to higher rates resulting in losses of 10.6 billion rupees. In other words, gas shortages with negative implications not only on the quality of life of the general public but also on productivity have been compounded by paying additional foreign exchange due to procurement delays.
But gas shortage appears to be a tip of the iceberg given the recent raise in the price of petroleum and products (petrol by over 10 rupees per litre) as well as the rise in electricity rates. While a rise in fuel adjustment charges can be laid at the doorstep of higher fuel prices in the international market which, technically at least, can also move downward, but a rise in the base tariff this month is reflective of sustained poor performance in the sector. More specifically, the poor performance is sourced to failure to check the rise in circular debt, which has more than doubled to 2.4 trillion rupees during the past three years, attributable to high transmission and distribution losses and theft. The government supporters’ argument that the rise in electricity tariff is due to the flawed contracts signed by previous administrations with Independent Power Producers (IPPs) has merit; however, ignored is the government’s failure to renegotiate with the 2016 IPPs (under the China Pakistan Economic Corridor) partly sourced to the failure to meet its financial obligations, in excess of 200 billion rupees, to the very same IPPs. These two factors alone are expected to push inflation into double digits and disturbingly the ones that would be hit the hardest would be the poor and the vulnerable as well as the lower to middle income earners who would be forced to increase their monthly outlays on electricity bills and transport costs which in turn would compromise their capacity to pay for other essential items, for example, high-cost protein foods (necessary for staving off stunted growth in their children) and school fees.
The budget outlay for the current year is 8.4 trillion rupees compared to 5.1 trillion rupees during the last year of the PML-N government, implying a massive rise of 65 percent in just three years – a highly inflationary policy. Tax revenues have not kept pace and have risen by less than 45 percent, implying thereby that the gap is met with borrowing – domestic and foreign – again a highly inflationary policy; (ii) the much-touted Ehsaas programme is 246 billion rupees which is less than 3 percent of the total outlay – an amount grossly insufficient to meet the 40 percent poverty levels in the country today; and (iii) the Kamyab Pakistan Programme has been reportedly trimmed due to pressure from the International Monetary Fund (IMF); however, the policy to lend to the poor at rates well below the discount rate without collateral has not been successful in the past as it was hijacked by the rich and fuelled private banking concerns.
The government has raised electricity tariffs and an ordinance is already drafted by the Federal Board of Revenue (FBR) withdrawing 330 billion rupee exemptions, requiring government approval to forward it to the Law Ministry for vetting – policies that reflect prior IMF sixth review conditions yet these are certainly not the only prior conditions given the fact that the talks have yet to be declared successful.
Shaukat Tarin, the Advisor to the Prime Minister on Finance, met Prime Minister Imran Khan in Saudi Arabia, fuelling speculation that his approval is sought for other politically challenging prior conditions. These may well include: (a) a raise in the discount rate by a couple of hundred basis points - a policy decision that may allow for intervention in the foreign exchange market as total debt repayments have risen by 2.2 trillion rupees since the budget was announced in June as has inflation, given that diesel plus other petroleum products and cooking oil constitute around 25 percent of our import bill; (b) a containment of expenditure which sadly would probably imply containment of development expenditure; (c) fast tracking privatisation that may compel the government to sell the family silver at throwaway prices; and last but not least (d) raising external indebtedness to fund the rising trade deficit, and the budget deficit.
This newspaper is of the considered opinion that the government is between a rock and a hard place, yet one would have hoped that the focus had been on launching a massive sacrifice effort by all recipients of the current expenditure, which may have mitigated the harshness of prior conditions on the general public and implemented structural reforms in the power and tax sectors during the first year of the IMF programme instead of deferring them as was the case during previous administrations. As matters stand today, the significant political leverage in terms of goodwill enjoyed by the Khan administration has dissipated.
