Economy: sanity must prevail

Times are tough. The fiscal deficit is slipping, and the circular debt is growing due to growing energy prices globally and inability of government — be it Pakistan Tehrik-e-Insaf (PTI) or Pakistan Democratic Movement (PDM) — lately to pass on the impact to the consumer.

These subsidies are probably make or break between Pakistan and the International Monetary Fund (IMF). The government must reduce both fiscal and current account deficits. For that a combination of increasing prices and rationing demand by applying conservative measures (as suggested by Pakistan Business Council) is warranted.

And the mantra that PTI government left land mines behind for the PDM government is being overplayed. The PTI government for most of its tenure did take tough measures and have faced public bashing for doing so – be it for controlling current account deficit in 2019 (due to previous government policies of overvalued currency and low interest rates), and then to face the commodity prices super cycle in 2021 and 2022.

What they did wrong (along with real estate amnesty scheme) was to offer a loot-sale budget in June 2021 and within six months, the austerity measures were in action through monetary and exchange rate policies actions. This is depicted by lower current account deficit (especially non-oil) in the last two months.

Then in February end 2022 the PTI government reduced the petroleum prices and froze them. The subsidy element was not big enough at the time. And this was done when the petroleum prices had already increased by 30 percent in the last 12 months. Even so, it wasn’t a wise decision.

The international prices went up after that and the subsidy element started growing. Now when the PDM government came to power, they didn’t increase the prices as recommended by the Oil and Gas Regulatory Authority (Ogra). And the subsidy element is growing. One could say that both PTI (in March 22) and PDM (so far) played to the gallery and refrained from taking tough decisions.

The populist approach by politicians is bringing fragile economy on the verge of collapse. This a great injustice to the country. The current account deficit is tamed in the last two months. The non-oil current account is in surplus.

However, fuel imports remained relatively low compared to higher commodity prices as the fuel imports for power generation was low. This is because Independent Power Producers’ (IPPs’) dues were growing due to widening gap between the payment (based on tariffs) and the fuel cost. Then the government was right to not buy LNG on exuberant spot rates.

Now there is sporadic electricity load-shedding across the country. That is putting pressure on the newly formed government. They have cleared some dues of the IPPs and have procured the most expensive LNG in the history.

The government bought four cargoes at spot (at an average price of $27/mmbtu) for $350 million. The government wants to buy no matter what the cost is to make sure that they have adequate supply of power. Will the government be able to pass the impact of increased fuel price on to buyers? May be not.

This is being done at a time when it is imperative to ration consumption. This author advocated a smart lockdown kind of situation to lower the demand. Now PBC (Pakistan Business Council) is saying the same.

They argue to reintroduce work from home. PBC has also asked for early closures of commercial centers and wedding halls and rationing of fuel for private vehicles. However, the government is buying fuel no matter what the cost, further exacerbating demand.

All this add up in ballooning import bill, and fiscal deficit (or circular debt below the line) gangrene. The order from the PM is to buy, no matter what the cost. This is like making sure an underpass project is built in record time, no matter what the cost is. Speed should not be priority all the time.

When a car runs at higher speed, it is usually not economical. Same is the case of economy. The pragmatic approach is simply missing.

Its politics that is driving the decision. The government is a coalition of many parties. Decisions are vetted by a number of leaders. Then within Pakistan Muslim League-Nawaz (PML-N) many leaders (including ex-FM Dar in London) are not in favour of increasing energy prices. And the PM wants speed. While the country reserves are falling fast.

The country needs some sanity. Hopefully, the FM Miftah will have a say in decision making. He is probably one of the fewest in the government who is making sense. The IMF negotiations are hinged upon increasing petroleum prices as prescribed by OGRA i.e., to abolish subsidy. This could have inflationary consequences; but those with empty pockets cannot be choosers. And to manage energy related import and fiscal subsidies, the country needs an energy czar – however, in a big cabinet, the energy ministry’s post is vacant. This tells that the priorities of the government are just not right.

Copyright Business Recorder, 2022