FeaturedNationalVolume 13 Issue # 13

In declensional mode

PML-N leaders continue to claim that there has been a significant improvement in the national economy due to the forward looking policies of the government. But this claim is not borne out by the evaluation undertaken by independent economists. This is particularly true with respect to the widening budget deficit, current account deficit and the continued heavy reliance on borrowing – domestic and foreign – at higher rates of return.
It may be recalled here that the PML-N government had started with plans of lower tax rates, privatization and filling the energy gap. Energy gaps have been thinned but at a cost of excessive capacity payment. This will hurt the economy even after twenty years; just as the ills of IPPs policy is hurting today. In case of taxation, the GST was raised in the first budget, the WHT and other indirect taxes are imposed across the board, to not only make compliance difficult but also increases the actual cost of taxpaying businesses. The individual income tax rates have increased while the corporate income tax rates have declined from one side, but super tax and higher dividend taxes have nullified all the benefits.
Actions speak louder than words. Consider the privatization progress, or perhaps the lack of it. The government failed to privatize any of the ailing PSEs including PIA, PSM and DISCOs. The benefit of doubt can be given to incumbents as dealing with employees union is a tough political choice. But how can the PML-N, especially the Punjab government, justify the formation of a plethora of new PSEs, for an array of power projects?
There is no need to mention how brutally economic institutions are manipulated to favour the sitting government – be it the SECP, CCP, SBP or OGRA. Most are headed by “yes men”. The only policy institution that is still working in its own capacity is NEPRA whose wings the government recently tried to clip by reducing its power. NEPRA has been raising a voice against the arbitrary allocation of power projects and the skewed energy mix.
The original policy was one of relying on indigenous power sources for the long term while the imported fuel projects were to fill in for the short to medium term gap. However, on the ground, all the new projects are either on imported RLNG or coal with no groundbreaking work done on indigenous power sources. The government came up with RLNG contract with Qatar on “take or pay” – implying that gas has to be imported or Pakistan pays anyway. Two RLNG terminals are operational with wheeling charges to be paid, irrespective of how much RLNG is re-gasified. Additionally, three RLNG plants have been set up with capacity payments to be made even in case of not running the plants.
Now if the gas is not purchased, we pay Qatar anyway; and even if the terminals are not used, we pay the charges regardless. And in turn, if power plants are not working, capacity payment will still be made. In essence, the country is booked to pay RLNG energy chain for the next two decades or so, irrespective of how much gas is being used. Two million new domestic gas connections are planned to be installed. The present policy of using domestic gas for inefficient household connections has long been criticized; and now the government is going one step further. The gas will be imported for inefficient stove burning at home at subsidized rates. Who will pay the differential? This may result in the formation of RLNG-based circular debt in years to come.

Last, but not least, is the continuity of the agriculture support price mechanism despite the fact that international wheat and sugar prices are on a downhill slide since 2014. The country has a surplus of wheat and sugar stocks which cannot be exported due to differential in prices. And the commodity financing is stuck at over Rs600 billion, brewing another circular debt. Sugar is supported to appease the political lobby at the cost of low cotton production which is hurting textile exports. And now surplus sugar is being exported at subsidized rates.

Experts have recently voiced serious concern over the fact that the Abbasi administration has already surpassed the one billion dollar budgeted reliance on procuring loans from the commercial banking sector abroad, which is at very high rates of interest with a very small amortization period, while programme/budget support loans from multilaterals and bilaterals have already sharply declined after the completion of the International Monetary Fund (IMF) programme last year. The reason: lack of donor comfort level with the government implementing agreed reforms without rigid IMF monitoring. Poor governance continues to be the hallmark in nearly all sectors while increased tax collections are sourced to the imposition of higher taxes rather than on widening the tax net, while the energy sector continues to suffer from rising circular debt and transmission losses.

A piece of good news is that in November exports rose by 12.3 percent in comparison to the corresponding period of the year before, and industrial growth increased by 8.77 percent in October in comparison to the corresponding period last year. Improved performance of these two indicators is certainly to be appreciated. However, it is relevant to note here that imports as per the State Bank of Pakistan rose from 17.730 billion dollars (July-November) 2017 to 21.881 billion dollars in the comparable period of 2018 accounting for a worsening current account deficit. As for industrial growth, it is relevant to note that not only was the base low in previous years but the components of this growth have shifted from textiles and other value added products to sugar whose surplus could only be exported through subsidy.

Equally, disturbing is the fact that foreign direct investment in July-November 2018 declined to 1000.2 million dollars from the 1774.9 million dollars in the comparable period of last year, despite the start of the implementation of China Pakistan Economic Corridor (CPEC) projects. If around a billion dollars is Pakistan’s absorption capacity for these projects, then the 46 billion dollar plus CPEC would take a long time to be completed.

The government has been claiming a growth rate that has been challenged by independent economists. Ground realities show that there are serious issues with the economy which must be tackled head on to avoid a negative impact on key variables. There is a consensus of opinion that there is an urgent need to change policies formulated by Ishaq Dar. But up till now there is no sign of this happening.