ISLAMABAD: Tariff increase is not the only solution to address power-sector challenges but it needs a holistic approach including targeted subsidy, reduce cost generation, and addressing distribution inefficiencies.
This was stated by the outgoing World Bank (WB) Country Director for Pakistan Illango Patchamuthu in an exclusive talk with Business Recorder, here on Thursday.
There are several challenges to the power sector and have four causes, said Patchamuthu, adding that one is high generation cost, which is highest, when compared to the regional peers.
The government is working on renewable energy to create a mix and would ultimately reduce the cost of generation.
He further said that up to 300 units were being consumed by 75 percent of the consumers.
This requires better targeting, he said, adding that subsidy for up to 200 units we can see but from 200 to 300 units per month is required reforms and rationalization and the subsidy needs to be more targeted.
Further, there are transmission losses and distribution system inefficiency as well collection and power theft.
So only tariff increase would not solve the power sector issues, he added.
He further said that putting Pakistan on a path to upper middle-income status requires significant increases in investment and productivity growth.
The only way to increase growth in Pakistan is to increase private investment and increase revenue collection, so the government is able to spend on social sectors, the country director emphasized.
However, this is a fundamental challenge and requires structural interventions.
Pakistan is not investing enough and its share of investment to the GDP is one of the lowest in the world at 15 percent, compared to South Asian average at 25-30 percent.
This translates into inadequate infrastructure, lack of access to sufficient levels of energy and water, and poor quality of schools, and hospitals.
Replying to a question about the ease of doing business, the country director said that during the Covid-19 some reforms were being done by the provincial and federal governments and demonstrated its commitment to continue with reforms.
The WB is now finalising its report on the measures and reforms undertaken and it would be released in October.
He further said that the intent to introduce reforms was worldwide demonstrated, which was important as when once the post-Covid situation comes to normalize, the commitment among the countries would remain strong and helpful in attracting investment.
With the current 10 percent private investment rate growth is unlikely to pick up.
Private sector investment needs to be doubled.
For Pakistan to become an attractive investment destination, business climate needs to be improved, and second is domestic resources mobilization, he added.
Replying to a question about the revival of the International Monetary Fund (IMF) Extended Fund Facility (EFF) programme, he said the programme was intact and discussions for the second and third review continued.
Answering another question about the difference between government, the IMF and the WB figures with respect to the GDP growth, inflation etc, and needs for reconciliation, the WB official said that the difference comes from different assumptions related to how Covid pandemic weigh and its impact on economy as different institutions have different assumption and data to figure out the prospects.
The country director further said that the tax-to-GDP ratio was around 13 percent prior to Covid-19, which was considerably low.
The Pakistan Raises Revenue (PRR) project is critical to implementation of harmonization of GST among the federating units and the federation, and would help Pakistan strengthen fiscal management, promote transparency and private-sector growth, and undertake foundational reforms in the energy sector to transition to low-carbon energy.
These reforms are critical to build fiscal resilience and stimulate recovery from impacts of the Covid-19 pandemic.
"Pakistan is suffering a significant fiscal shock from the economic fallout from the pandemic and the increased spending on crisis response, including emergency healthcare, social protection, and business support," said Patchamuthu.
He said that RISE programme supports the government efforts to achieve macroeconomic stability, accelerates long-delayed policy reforms, and sets the course for a strong and competitive economy.
The programme supports reforms to broaden the tax base and reduce distortions in tax policy, strengthen debt management and transparency, and implement urgently needed reforms to achieve financial viability of the power sector.
In tandem, reforms to lower barriers to the formalization of firms, increase the use of digital payments, and better regulate real estate developments will help create an enabling environment to attract private investment.
"RISE supports reforms such as harmonizing sales tax and making the trade tariff structure more competitive. This could help the country attract new investments and spur economic recovery," said Shabih Mohib, lead country economist for the World Bank.
Taken as a whole, we hope that RISE can build a foundation for sustainable growth driven by the private sector, he added.
RISE is aligned with the government's Covid-19 crisis response, which aims to scale up spending on health and social protection, while pursuing macro-fiscal reforms in the face of economic contraction.
Copyright Business Recorder, 2020
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