FeaturedNationalVolume 14 Issue # 10

Perils of ad hocism instead of policy

The government has increased the power tariff by Rs1.27 per unit, with a Rs130 billion annual burden on end-consumers. It also plans to bring a second mini-budget in early January next year. The Pakistani rupee has lost about a third of its value since the start of 2018. Prices of all essentials have already skyrocketed and the new measures will take them beyond the reach of the common man.

It appears the government has no concrete plan to improve the economy and it is only busy at firefighting. It has failed to evolve a mechanism to improve the conditions, without overburdening the masses. It is a second power tariff hike in the first four months of the Pakistan Tehreek-i-Insaf government (PTI) of Prime Minister Imran Khan, who had promised to reduce prices during his election campaign. In September, the government had approved a Rs2 per unit hike in electricity prices to contain rising circular debt of the power sector, which has swelled to over Rs1.3 trillion in the last five years after payment of Rs480 billion in 2013. The International Monetary Fund (IMF) had asked the government to increase the power tariff by about Rs3.75 per unit when it started negotiations with Pakistan for a bailout package. By increasing the tariff, the government has almost met the condition, though it says it is not in a hurry to go to the IMF and has averted the balance of payment crisis. The government may have averted the crisis but the common man is deeply perturbed. Actually, it the first government in Pakistan, in which nobody is happy. From industrialists to shopkeepers and government employees to labourers, all are displeased with its performance. Perhaps, it is the only government in Pakistan that has doubled household bills and budgets in just four months.

Despite many rounds of talks, differences persist between the government and the IMF over many issues as they could not agree to the timing and pace of the fiscal adjustment and structural reforms. It is said the IMF mission has raised questions over Pakistan’s memorandum of economic and financial policies. The questions related to the proposed fiscal adjustment, energy pricing, monetary and exchange rate policy and structural reforms contained in the government’s proposals. The IMF has reservations over the viability of the government’s proposals in all areas, although the degree of disagreement varied. The mission also raised questions over the way forward on state-owned entities. The IMF was demanding most of the policy actions, both fiscal and structural, to be frontloaded in the first year, while the government wants them spread out over three years of the programme and in some cases to run into the fourth year of the government.

As the IMF package still appears to be distant, Moody’s – the global credit rating agency – has hinted at the possibility of downgrading Pakistan’s external credit rating ahead of the country’s plan to float a Eurobond aimed at raising $3 billion from world markets. The debt level of Pakistan – whose foreign currency reserves have dropped to the critical level of around one and a half months of import cover – is expected to swell with weak repayment capacity. The grave situation may convince the agency to downgrade the rating. At present, Moody’s maintains “B3 negative” credit rating for Pakistan. “The negative outlook is primarily driven by heightened external vulnerability risk. A further deterioration in Pakistan’s external position, including a more pronounced erosion of foreign reserve buffers, which would threaten the government’s external repayment capacity and heighten liquidity risks further, would likely result in a downgrade of the rating,” Moody’s said in its annual credit analysis of Pakistan. The report said, “Expectations that government debt would continue to rise markedly, with a related deterioration in debt affordability from already weak levels, could also lead to a rating downgrade.” It expects real GDP growth in Pakistan to slow to 4.3-4.7pc in fiscal year 2019 and fiscal 2020 from 5.8pc in FY18 in part due to policy measures taken to address the external imbalance.

The Fitch Ratings, one of the three major global rating agencies, has also cut Pakistan’s debt rating deeper into junk territory as the country grapples with a lethal combination of low reserves, elevated debt repayments and a weakening fiscal position. The rating agency said it had downgraded Pakistan’s long-term foreign-currency issuer default rating by one notch to B- from B. The move is in reaction to the country’s rising debt level which is expected to swell due to its weak repayment capacity. At $7.3b, Pakistan’s foreign currency reserves have dropped to the critical level of around one-and-a-half months of import cover. Over the next three years, the country’s sovereign debt-service obligations will range between $7b-$9b per year, which includes a $1bn Eurobond repayment due in April 2019. “The rupee depreciation, lower oil prices and newly imposed import duties will drive a deceleration in imports, while exports are likely to strengthen gradually,” it observed.

The government has already received $2 billion from Saudi Arabia, out of promised $3 billion, and the final tranche is expected to be received in January. Saudi Arabia has also committed oil on deferred payment to the tune of $274 million on a monthly basis. Similar assistance has been received from China and the UAE. However, high hopes of people have already been dashed. They were waiting for a miracle in their lives from the PTI government, but it has not happened. Instead, their lives have become harder. The government has increased gas rates once, power tariff twice and brought a mini-budget to increase prices of over 400 items in its first four months. Its mood shows the next few months could be even harsher. It could have provided relief to people by slashing diesel and petrol prices, but it only marginally reduced their rates despite their international prices having dipped significantly in the international market.

The government has announced presenting its second mini-budget to the Parliament in early January, as the current level of fiscal deficit is not sustainable. According to Finance Minister Asad Umar, the government is considering a proposal to increase taxes and tariffs. In order to curtail the budget deficit at the desired level, the IMF wants additional taxation measures to bridge its yawning revenue shortfall during the current fiscal year. Different proposals are under consideration to jack up tax collection in the remaining period of the current fiscal to reach close to Rs4,398 billion on June 30, 2019.

The government has only taken ad hoc measure to run the financial affairs of the country, which have badly hurt the people of Pakistan. The government could have increased revenue generation through mini-budgets and electricity price hikes even without a team of economy experts. It has resorted to what it used to criticize as an opposition in the last government. However, the government will not be able to continue with the approach for long and as some ministers have also feared that a “yellow vest” protest movement could also start in Pakistan.

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