Lessons Not Learnt

By Amir Zia
Money Matters
The News
Dec. 26, 2011

The SBP in its report has not offered any new diagnosis and prescription for the country’s economic woes. It has reiterated and reasserted what already remains known, but being one of the top regulators, the SBP’s observations carry weight which weighs hard on the government and its team of economic managers

The charge sheet of poor economic governance against the government has now become official with the release of the State Bank of Pakistan’s (SBP) annual report on the state of the country’s economy. Although the SBP’s report for fiscal 2010-11 has not revealed anything new, it summed up in detail the mismanagement and failures of the Pakistan Peoples’ Party (PPP)-led government in handling the country’s economy, putting an official seal to its verdict.
In these uncertain and volatile political times, when the government faces mounting overt and covert pressure from the opposition and a segment of state institutions to quit and call early elections, the SBP report proves yet another blow for this beleaguered setup, which appears battling for its survival.
All the red flags raised by independent economic experts and analysts about the government’s inaction on crucial policy matters, misjudged priorities and poor governance have been bunched together in the SBP report which paints an alarming picture of the state of the economy.
The continuing cycle of stagflation stems more from what the SBP calls ‘the structural deficiencies’ in Pakistan economy than any other factor. The irony is that the government has no strategy and political will to lead the country out of it.
The age-old fiscal problem, often described as the mother of all economic ills by experts, continues to haunt the economy as the government fails to expand the tax base despite repeated promises made to the International Monetary Fund (IMF) and local stakeholders. The imposition of the value-added tax (VAT), re-christened the reformed general sales tax (RGST), has now become a forgotten story. The government also has no plans to impose fair taxes on the grossly under-taxed sectors of the economy including agriculture and services.
The massive fiscal slippages on domestic debt and the crowding out of the private sector add to the economic woes, which are compounded by the acute power shortages. On the external front, Pakistan braces for tough times because of a possible slowdown in exports due to the recessionary economic trend in the United States and European Union.
Pakistan’s massive flow of workers' remittances, which allowed the country to achieve record high foreign exchange reserves earlier this year, could also take a hit in the coming years because of job losses in the recession-hit world economy.
The bigger concern should be the drying up of external inflows from international financial institutions which play a crucial role in slashing the country’s budget deficit. The gist of all these four inter-related factors of concern – highlighted countless times by a number of economists – have been summed up in one paragraph on the very first page of the SBP report.
The following pages of the report remain a chronicle of what the government failed to do pushing the country’s economy into a deeper hole.
‘The real issue is the government’s inability to implement fiscal reforms, and in some cases, not even being able to secure the required legislation,’ the report says.
The crucial decisions of the imposition of RGST, broadening of the tax net, phasing out of subsidies in a timely manner and restructuring the loss-making public sector enterprises were either delayed or not implemented, the report added.
Yes, it is the sad story of one failure after another. The Finance Ministry’s spin masters, including Finance Minister Abdul Hafeez Shaikh, must come out with an explanation for their inaction on crucial policy matters.
The SBP report devotes an entire chapter to the energy sector, highlighting the way the government mismanaged its affairs, starting from the controversial decision of bringing in rental power projects (RPPs) to that of the unnecessary delay in dealing with the problem of circular debt.
‘In our view, commissioning of RPPs to increase generation capacity was misplaced, as Pakistan is operating well below its installed capacity due to the circular debt problem,’ the report said.
‘In May 2011, the government disbursed Rs120 billion to Pepco in lieu of outstanding subsidy payments; however, this amount was not sufficient to resolve the issue conclusively, and total circular debt had reached to Rs251 billion by end-June 2011.’
The report says that in the final analysis, all the economic problems can be traced to poor governance. ‘Economic policies will be ineffective unless they are supported by strong institutions and are consistent with other government policies.’
‘A cross-country comparison shows that institutional weakness at all levels of government; the judiciary; civil service; law enforcement; regulatory bodies and agencies for oversight and accountability, are directly responsible for poor economic growth.’
No wonder that this situation has wrecked the business environment in Pakistan, where extremism and terrorism also work as a dampener and discourage both foreign and local investment.
According to a recent study by the World Bank on the ease of doing business, Pakistan has slipped to 105th position from 96th out of 183 countries evaluated.
As political polarization and tussle increases and the country wobbles from one crisis to another, the tidings for the economy remains bad.
The PPP government, which failed to carry out reforms in the earlier part of the term, hardly seems in a position to start the corrective measures now because it is locked in a battle for survival. The looming elections will also discourage the ruling party and its allies to initiate reforms. The longer political instability and uncertainty persist, worsen the economic situation would get. The country’s economic woes manifested through double digit inflation, low growth, growing unemployment and acute energy shortages will further fan social unrest and political turmoil. One crisis feeding the other, making economic recovery a much lengthier and more painful job for any set of present or future economic managers.
The SBP in its report has not offered any new diagnosis and prescription for the country’s economic woes. It has reiterated and reasserted what already remains known, but being one of the top regulators, the SBP’s observations carry weight which weighs hard on the government and its team of economic managers. However, the SBP’s warning shots are unlikely to change the ways of the government ñ at least for now.

Destined to fail

By Amir Zia
Weekly Money Matters
The News
October 24, 2011

There is a need to build a political consensus among all the major stakeholders, especially the political parties, on the vital issue of energy conservation.

The federal cabinet’s October 12 energy conservation plan has been off to a rocky start. Shopkeepers are angry and threatening protests and shutter downs if forced to close shops early. They want to keep to business as usual, which for many of them means starting the day late at around 11 a.m. or 12 noon and keeping shutters open till past midnight -- even in times of an acute electricity shortage. In big urban centres, including Karachi and Lahore, late night shopping remains a trend for the past many decades now.
The small and big chambers of businesspeople and industrialists -- from Karachi to Peshawar -- are also unanimously opposing the two weekly days off. They say it hurts productivity, hits exports and general business activities at a time when the overall economy remains sluggish and sentiments negative. They want low power tariffs and an uninterrupted supply, which appear fair demands on paper, but unfortunately beyond the powers of this government to fulfil. The magic wand quick-fix solutions are only the stuff fit for fairy tales and not of the troubled world we live in.
The major opposition parties and provincial governments say that the centre announced the controversial plan without consultation or taking them into confidence. They appear in no mood to cooperate.
Yes, the overwhelming response to the cabinet’s decision of reintroducing two weekly days off, closure of shops at sunset and staggering holidays in the industrial sector to reduce power consumption during peak hours, remains of disapproval and defiance.
The only section of the population that appears contented and happy with the plan are the government and private-sector employees, including those of banks, who now get an extra day off on Saturday. They can sleep longer, relax a bit more and have time with their families or in front of the television -- depending on the bent of mind. But the harsh fact remains that the satisfaction of these fortunate few is not going to end the energy woes of Pakistan.
All the bickering, the divide and discord over the federal cabinet’s energy management programme indicates that like the past, it is destined to fail again. The coming winters are likely to be tougher for most Pakistanis as massive energy shortages, including that of natural gas and of hydro-power, will hit every section of society.
The struggling government and its institutions lack the capacity and ability to address the complex challenges of the energy sector in the short- to mid-term even if from today every decision and step they take remains 100 percent professionally sound and honest.
There are no quick fixes to the complex problem of massive circular debt which hovers at around 300 billion rupees. This has been the most significant factor behind the current electricity woes in the country which has sapped the liquidity of major companies operating in the energy sector -- from upstream to the downstream institutions. No wonder that despite having a generation capacity, the output of power plants remains low as one institution fails to clear the dues of the other.
The non-payment of dues, massive electricity theft and land and line losses aggravate this problem.
The government does not have the kind of political will which can take decisive steps against the parasitical vested interests nor does it have the resources needed to revamp the rickety old distribution network of the power companies.
The high and volatile international oil prices also remain beyond the government’s control, while the plans to import natural gas from the Central Asian countries and Iran still remain a pipe-dream.
What could be the possible options in this scenario?
Of course, the government has to plan for the long-term, which means at least giving the authorities 5 to 10 years to complete the high investment projects if they start work on them from today. This includes giving a fresh impetus to the exploration of new hydrocarbon reserves and exploiting the available ones including Thar coal, which remains easier said than done given the high risk of investment and the current security environment in the country. But still this is one avenue which offers hope over the next 5 to 10 years.
Construction of new mega dams is not just a high investment game but a political hornet's nest and a big environmental issue. A dam can take years and years to materialise even if hypothetically, political parties build a consensus on this tricky issue.
Import of multi-billion dollar natural gas through pipelines from Iran or Central Asia is tied to bigger regional and geo-political developments. It also remains a prospect for some distant future.
To ease the energy problems in the near term, the government has to start with restructuring of the power sector, fighting the menace of the deep-rooted corruption, electricity theft and controlling the distribution losses as well as to take measures to conserve energy.
The federal cabinet’s October 12 announcement may be a good plan on paper for energy conservation, but it remains poorly executed. However, this does not mean that the idea should be abandoned.
The energy poverty of Pakistan can be addressed to an extent in the near-term by educating people about the need to make the best use of sunlight and an intelligent and prudent use of natural gas and electricity.
There is a need to build a political consensus among all the major stakeholders, especially the political parties, on the vital issue of energy conservation. Once there is a consensus, the authorities need to implement the plan in all fairness and without any wheeling and dealings with interest groups.
Pakistani state institutions have a poor record of giving concessions to pressure groups. The more vocal or violent the group is, the bigger concession it can extract from the state. This needs to be changed and the state must establish the rule of law. In the case of the energy conservation drive, it simply means applying already framed laws which require shops to shut businesses at sunset and start their day early. This is practiced all over the civilized world. Why can’t it happen in Pakistan? Why we are not ready to give up our bad habits of starting the day late?
The shutter power managed to doom such energy conservation drives in the past as well. Will they be allowed to succeed again?
The major political parties, some of whom enjoy a firm vote bank among shopkeepers and traders, need to rise above their petty politics and self interest and help the government implement this plan. The opposition Pakistan Muslim League Nawaz and the two government allies – the Muttahida Qaumi Movement and the Awami National Party -- can play a crucial role in implementing this plan.
The government also needs to convince the media and other leaders of public opinion about the merits of energy conservation. But before it does so, it needs to take symbolic steps of conserving energy itself. This may include switching off air-conditioners at the Parliament House where even during the hot summers of Islamabad, lawmakers appear in imported suits and jackets. Why can’t these public representatives dress up in line with the Pakistani climate rather than donning clothes which suit cooler European climates more?
When the people see the ruling elite pitching their share in energy conservation -- no matter how symbolic -- they will also not hesitate in doing what is required of them.
The recent bouts of violence in several cities of Punjab and the past energy riots in Karachi show that the energy crisis has all the potential to transform into an explosive political issue that can further shake this already polarised and divided state. The energy issue is also directly linked to the economy. The wheels of production must not stop. That needs to be given top priority. Until the country seeks long-term solutions to bridge the energy deficit, energy conservation is the only way through which we can mitigate the intensity of this crisis. We must not hesitate in making the right choice -- no matter what the cost.

Budget: Targeting The Impossible

By Amir Zia
June 5, 2011
The News

Pakistan has been missing its revenue and fiscal targets for four years in a row now and meeting them remains vital not just to satisfy the International Monetary Fund, but also to revive the country’s economy which remains stuck in a low-growth and high- inflation cycle.

These are indeed tough and depressing times for the Pakistan economy, but going by Finance Minister Abdul Hafeez Shaikh’s assessments, a turnaround now seems within grasp. After braving all the aggressive booing and hostile sloganeering of Pakistan Muslim League Nawaz (PML-N) lawmakers a day earlier, the finance minister bounced back and appeared his usual calm, poised self on Saturday at the post-budget press conference, trying to explain and sell his budgetary measures, which many experts believe remain unrealistically optimistic.
But Shaikh and his economic team members appear unruffled by the bitter criticism of political opponents and those experts who predict only gloom and doom for the economy.
The post-budget press conference, where orderly-seated journalists appeared in a sharp contrast to the rowdy and unruly PML-N lawmakers, provided Shaikh a perfect platform to explain what he could not do in the National Assembly. And Shaikh certainly made the best use of the opportunity, speaking with eloquence and conviction — a more or less similar impressive performance, which he gave last year while presenting the budget of 2010-11. However, his pleas to reform and restructure the economy and expand the tax-base at that time failed to impress his political bosses and the Pakistan Peoples’ Party (PPP)-led government missed most of the crucial targets set for this out-going fiscal.
But this poor performance apparently has not dampened Shaikh's spirits. He looks convinced that measures taken so far provide a foundation to build-on and will lead to a better economic performance in the coming year. “We may have not achieved 100 percent results, but more than 50 percent work has been done,” he said.
While many may find this performance below average, the government maintains that it remains satisfactory against the backdrop of the country’s worst floods in its history, the sceptre of terrorism and high global oil and food prices.
Shaikh insists that there are reasons to be optimistic about the country' economic team performance in the new fiscal year as he aims for some ambitious revenue and fiscal targets, which most experts find difficult to achieve. For many sceptics, the most improbable milestone in the 2011/12 budget — having an outlay of 2.767 trillion rupees -- is that of raising revenues of 2.732 trillion that includes both tax and non-tax revenues. The Federal Board of Revenue (FBR) will have to collect a staggering 1.952 trillion rupees in the coming fiscal, compared with the targeted 1.588 trillion rupees for the outgoing fiscal.
The government hopes to achieve this target on the back of expanding the tax-net and a crucial step in this regard remains bringing several sectors, which so far have enjoyed exemptions, under the umbrella of general sales tax.
Another important step remains the withdrawal of sales tax exemption on local supplies of five zero-rated sectors. It indeed provides a new source of revenues for this cash-strapped government.
The government’s move to bring new potential 700,000 taxpayers in the tax-net in a country where only 1.5 million people file returns could also help boost revenues if FBR manages to follow this task till the end. The government hopes to collect 70 billion rupees through these newly identified tax-payers.
However, the task is easier said than done. It requires a bold and brave attempt from the FBR to raise 1.952 trillion rupees revenues. But the target is worth trying. Don’t we miss all those shots which we never attempt?
Another crucial target directly linked with FBR’s performance and the government’s ability to maintain financial discipline is that of keeping the fiscal deficit at 4.0 percent of the gross domestic product (GDP).
In the current fiscal, the government failed on this front as the deficit is likely to hit 5.9 percent by the year end if the government decides to allocate 120 billion rupees to settle the circular debt problem, stifling the country’s entire energy sector.
Pakistan has been missing its revenue and fiscal targets for four years in a row now and meeting them remains vital not just to satisfy the International Monetary Fund (IMF), but also to revive the country’s economy which remains stuck in a low-growth and high- inflation cycle.
One commendable proposal of the budget remains slashing subsidies target to 166 billion rupees, including that given to power sector, from the highs of 395 billion rupees in 2010-11. In the current fiscal, power sector subsidies alone remain more than 200 billion rupees. If the government meets this target, which definitely appears impossible given the current state of affairs at the public sector companies, it would be one great leap forward.
Overall, the current budget proposal focuses more on stabilisation than on trying to push the country into a high-growth trajectory through sweeping bold structural reform measures. This reflects through its decision of sticking to the current regime of general sales tax and abandoning the idea of the value-added tax and the reformed general sales tax.
The direct tax on agriculture income, which is the domain of provincial governments, also seems on the back-burner and will be imposed in a diluted form. One could expect no better from a parliament dominated by feudal lords and tribal chiefs.
Another area on which the government seems to lack a clear-cut policy remains the restructuring and privatisation of the loss-making public sector enterprises. The way this government has been dragging its feet in settling the labour dispute at the privatised Karachi Electric Supply Company manifests a contradiction in policy and action. The government needs to align them, though it seems an impossible task given the fact that it has entered the fourth year in its office and is now eying the next general elections. One should not expect difficult and bold decisions at this particular juncture from this politically-embattled coalition government, which does not want to upset the carefully laid applecart at this point in time.
Under these circumstances, if Finance Minister Shaikh and his team manage to achieve the revenue target, keep the fiscal deficit at 4.0 percent and boost growth to over 4.0 percent in fiscal 2011-12, it will be a huge achievement. Let’s hope that they succeed this time and achieve 100 percent results. Pakistan’s economy can’t afford any more failures and mistakes.