EDITORIAL: Federal Finance Minister Muhammad Aurangzeb, while talking to a group of investors led by Barclays, stated that the government is focused on implementing structural reforms in core sectors including energy, state owned entities, privatisation, taxation and right-sizing of government.
With respect to the energy sector negotiations are underway to renegotiate contracts overwhelmingly in favour of Independent Power Producers (IPPs), signed by PPP, Musharraf and PML-N governments that envisaged capacity payments and repatriation of profits.
Without a consensus on the way forward IPPs have the option to go for international arbitration to seek redress on violation of contracts, which explains why the power sector officials rightly insist that they cannot unilaterally amend the contracts.
There is talk of “good news” on this front as agreements with five IPPs have been signed that may lead to a significant per unit respite in tariffs; however, it is relevant to note that electricity consumers pay 35 rupees each month as Pakistan Television fees, 15 rupees for Radio Pakistan (though viewership and listeners have been steadily contracting) and numerous taxes that are not dedicated to sorting out the sector but used at the discretion of the government.
In addition, two recent decisions are cause for anxiety: (i) the thrust towards renewable power, a cheap source of energy, by the federal and provincial governments, without first formulating a policy in this regard has resulted in lower demand from the national grid necessitating a rise tariffs to meet the capacity payment bill; and (ii) the 55 billion rupee subsidy for two months paid for by the Punjab government (against 50 billion rupees subsidy paid by the federal government country-wide for the two months) reflects irresponsible use of existing scarce funds.
State-owned entities are to be privatised and in this context there is concern that domestic investment climate remains challenging while investment from friendly countries is unlikely to be forthcoming without extending significant fiscal and monetary incentives that may act as a further impediment to domestic investment and, like in the case of contracts with IPPs, may envisage unaffordable rates for the public in future.
Sadly, like its predecessors the focus of the incumbent government remains on revenue generation rather than on implementing structural reforms that seek to transform the existing tax structure into fair, equitable and non-anomalous tax system.
To date the reliance on indirect taxes whose incidence on the poor is greater than on the rich, remains very high and the Federal Board of Revenue (FBR) continues to generate 70 to 80 percent of direct taxes from withholding taxes imposed in the sales tax mode.
The Finance Minister referred to right-sizing of government, a decision that one would hope envisages a slash in current expenditure not yet evident in the data releases by government ministries/departments. Or, in other words, so far this pledge reminiscent of pledges made by previous administrations as well remains unmet.
To cut the budgeted development outlay to meet the budget deficit targets continues to be the favoured policy like in previous years; however, this will have negative repercussions on GDP as it is the engine of growth, given the decline in private sector output due to lower demand as the public struggles to meet its utility bills.
Aurangzeb further contended that Pakistan was known as a single tranche country, as our administrations typically abandoned International Monetary Fund (IMF) programmes as soon as the balance of payment (BoP) position stabilised as the conditions were politically extremely challenging, leading to a recurring need for an IMF loan which accounts for Pakistan being referred to as a perennial borrower, an epithet retained by the country to this day as the incumbent finance minister reached a staff-level agreement with the Fund on 12 July this year on the twenty-fourth IMF loan.
To conclude, so far the major achievement of the government has been to secure the IMF loan that necessitates implementing the conditions, which the government has pledged – conditions that include upping the utility rates, the levy on petroleum and products, and reduction in subsidies on essentials with severe implications on the public’s socio-economic well being.
Out of the box thinking is required that must include sacrifice by the major recipients of the budgeted current expenditure for at least a year, formulating a policy for renewables and considering linking the fees for PTV and radio to those who use these services, privatisation effort must be deferred till a favourable investment climate is evident while rightsizing must envisage implementing the devolution of 15 ministries as agreed in 2010 with the passage of the eighteenth constitutional amendment.
Copyright Business Recorder, 2024
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