High energy prices strangling economy

The week ended 4th April was witness to two unprecedented events. Firstly, the Chief Justice of Pakistan established an Enquiry Commission, under the chairmanship of the former Justice Bhagwandas, to examine the fixation of petroleum and gas prices. Secondly, the IMF confessed that Pakistan was in a poorer state despite having followed IMF dictated policies.
Despite the IMF submission and strong opposition from seasoned politicians within the PPP government, the Prime Ministers textbook-economist adviser, Shaukat Tareen, following in the footsteps of his infamous namesake, continues to blindly follow the IMFs policy of high interest rate and high energy prices. In the process, an already fragile economy has been plunged into an unprecedented period of stagflation.
Back in January, Federal Industries and Production Minister Mian Manzoor Wattoo warned that "Current high rates were not only increasing the cost of doing business but had also affected competitiveness of industrial producers in a big way" and were "hampering industrial growth".
Just a few weeks ago when the PMs economic adviser found it rather taxing to achieve the agreed GDP growth rate of 3.5%, he begged IMF to revise the figure downwards to a meagre 2.5% at a time when both inflation and the IMF dictated interest rate stood at historical highs of 25% and 15% respectively.
In sharp contrast to Pakistan where agflation (agriculture based inflation) peaked at 35%, the rest of the world is already enjoying the eradication of agflation that peaked in January 2008 and played havoc with food prices.
This agflation was primarily as a result of the double whammy of increasing international oil prices and the increasingly extensive use of land and crops for bio fuels and the diverting of grains for the production of fashionable energy alternative ethanol.
In sharp contrast to Pakistan, both developing and developed economies around the world are beginning to enjoy the fruits of a massive drop in the growth of inflation and near-zero interest rates caused by the plunge in the international oil and commodities prices. In the west, Eurozone inflation and interest rate have fallen sharply to 1% and 1.5% respectively as oil and other commodity prices collapsed in the face of a deep economic downturn and demand depression.
The Bank of England has sharply axed its interest rate to 0.5%, its lowest level since the bank was founded in 1694. In the US, both the inflation and interest rate have hit record lows of 0.2% and 0.25% respectively. Moving closer to home, inflation in neighbouring India fell to near zero (0.27%) for the week ended March 27 from a 13-year high of 12.9% last August.
This has been largely contributed to cheaper fuels and energy and plunging food prices. Despite the world-wide economic slowdown, economic growth in India for the fiscal year ended March 31 is expected to exceed 7%. Indias chief economic adviser to the Ministry of Finance, Arvind Virmani, made it crystal clear that in todays world-wide demand depression, monetary policy is the first line of defence. In true walk-the-talk style, during the same week the Reserve Bank of India lowered its interest rate from 5.5% to 5%.
As if it were to rub salt into the wounds of the suffering people of Pakistan, immediately following the latest cut, IMF advised India to initiate additional monetary easing in the form of further interest cuts. In sharp contrast, since the emergency IMF loan agreement in November 2008, the State Bank of Pakistan increased interest rates by 2% to a 10-year high of 15% under the conditions of the IMF loan and at a time of acute demand depression.
The latest hike in interest rate came at a time when rates were hitting historical lows across the world. By accepting the conditions of the emergency IMF loan agreement, the Prime Ministers textbook-economist adviser has plunged Pakistan into a catch-22 scenario. On the one hand he continues to insist that the interest rate cannot be cut until inflation is down. On the other hand he persists in maintaining in parallel an artificially high fuel and energy price policy to help ensure that inflation cannot possibly come down!
To illustrate the critical role of fuel, energy and food prices during the current world-wide demand depression and its impact on inflation and interest rates, data has been correlated for the Eurozone, India and Pakistan. In both the Eurozone and India, the policy has been to immediately reflect plunging international oil and commodity prices in the domestic pricing.
The charts clearly show a very high correlation and causal relationship between international oil prices, inflation and interest rates. The charts clearly illustrate the decisive role of international oil prices in domestic pricing. The same data for the same period is illustrated for Pakistan where the benefits of the plunging international oil and commodity prices were NOT passed on to domestic prices.
In contrast to the rest of the world, the chart for Pakistan shows NOT even the weakest correlation or causal relationship between international oil prices, inflation and interest rates. To add insult to injury, fuel and energy prices were artificially raised, by our economic adviser, in the name of eliminating subsidies under the conditions of the IMF loan at a time when diesel to farmers in India is 90% subsidised.
The fact that all this economic folly coincided with a world-wide and domestic demand depression helped to inflict maximum long lasting economic pain in the form of record inflation, massive unemployment, plunging exports, industrial meltdown and record loadshedding. Sadly, although the full impact of the economic folly is still to be felt, western analysts are already warning that Pakistan is "on the verge of an economic meltdown".
The Supreme Court of Pakistan appointed Enquiry Commission, under the chairmanship of the former Justice Bhagwandas, to examine the fixation of petroleum and gas prices will also need to investigate and provide answers to the following questions:
Why did the National Electric Power Regulatory Authority (Nepra) recommend a massive 61% hike in consumer electricity prices at a time when international oil price was coming down?
During the week ended 6th September 2008, the International oil price hit a five-month low, the Sensitive Price Index surged by an historical 31%, Nepra recommended a massive 61% hike in consumer electricity prices and the PPP ministers delivered yet another blow to the stricken electricity consumers by immediately approving the Nepra recommendation but finding in their hearts to restrict the increase to just 31%. All this was on top of the 60% increase in oil prices during the previous few months.
Why Nepra failed to recommend and the government failed to pass on benefits, to domestic consumers, of tumbling international oil price from its peak of $147 in July 2008 to its low of $36 during December? Farmers, transporters, industrial units and domestic consumers are still paying the diesel price of the time when the international market was $147 per barrel even though the oil market tumbled to $36 and today stands at $48 a barrel.
Why Nepra failed to fulfil its duty to readjust electricity prices monthly with effect from July 1st to ensure that the burden of increases and the benefits of decreases in international oil price are swiftly shifted to the consumer? A little bit of background. The Finance Bill 2008-9 included an amendment that authorised Nepra to readjust electricity prices monthly with effect from July 1st.
Previously, Nepra was mandated to review electricity prices every six months. When the amendment was proposed, it was vehemently criticised by many legislators in both the Senate and the National Assembly because they feared that price adjustments would be unidirectional - up, up and up even when international oil prices plummeted. That is exactly what we have witnessed during the historical week of 6th September 2008 described earlier.
Despite record earnings, reportedly 12 billion and 18 billion during January and February 2009 alone, why did the government fail to pay the power generation companies in a timely manner to avoid loadshedding due to non-payments? What was the interest earned on these earnings whilst they remained deposited in government accounts instead of being paid to the IPPs? Have all the earnings on deposits been accounted for in the public accounts? This should also be investigated in parallel by the Public Accounts Committee.
Despite the record earnings, why has the circular debt reportedly risen from Rs 159 billion in January 2009 to Rs 180 billion by the end of February, belying the claims by the government that it was focusing on reducing the debt? Since this debt is primarily related to the energy sector, it should be investigated by the commission.
After calculating the short, medium and long term economic damage inflicted by the governments misguided high fuel and energy price and high interest rate policy, the commission should determine whether the inflicted damage was really worth the few billion dollars of IMF loans? The Commission should also look into why we still have a failed text-book economist as economic adviser to the Prime Minister? A little bit of background.
Having miserably failed to revive the economy and control inflation, our economic adviser is on record as having comically advocated the use of "mobile courts as price control courts". Perhaps it would have been more appropriate if the economic adviser had labelled the unelected advisers the "Holy Cows" of Pakistan rather then attributing this term to the farmers. (The writer is an MNA)