All is not well at the economic front

The Federal Minister for Finance and Revenue Muhammad Aurangzeb reaffirmed this Wednesday at the ‘International Affordable, Green & Resilient Housing Conference’ that Pakistan’s macroeconomic indicators are “moving in the right direction”. This sounded reassuring to the market sentiments.

Whereas, coinciding with the statement of the Finance Minister is the statement of Petroleum Minister Musadik Malik who while talking to journalists is reported to have stated that the five LNG cargoes scheduled for 2025 under long-term agreements with Qatar had already been cancelled, and negotiations are ongoing to defer an additional five cargoes to manage the surplus LNG in the country.

“Pakistan has already postponed five LNG cargoes and postponement of five additional cargoes is being considered further,” he said, adding that LNG had become surplus as LNG-based power plants were sidelined due to the economic merit order, and the private sector was unwilling to purchase LNG due to its high cost. Declining electricity consumption due to sluggish economic activity is being blamed for delay of LNG. This statement holds ground as the same is reflected in the shortfall of revenue generation.

The Federal Board of Revenue (FBR) has intimated to the government that tax shortfall may further widen to around Rs400 billion by the end of December.

Against the target of Rs4.64 trillion, the FBR collected Rs4.295 trillion in five months, achieving a growth of 23%. It needs a 40% growth to reach the annual goal of nearly Rs13 trillion. The IMF will assess December’s tax collection before deciding on bringing a new tax-loaded budget.

The hiring of foreign-funded consultants and cash awards among taxmen can do little as the basics are just not right and the foremost is the loss of revenue on account of industrial slowdown as the energy costs are just not feasible.

The energy sector of the country remains chaotic and clueless to manage the crisis.

Pakistan usually imports between 120 and 140 LNG cargoes annually, with the majority (about 85-100) coming under long-term contracts with Qatar, along with additional long-term agreements and spot purchases. The country has not imported spot cargoes for nearly a year due to surplus electricity capacity in the system and a decline in consumption, ranging from two per cent to 18pc in different months.

The government has been urging independent power producers (IPPs) to prematurely terminate contracts in an effort to reduce capacity charges. At the same time, it recently introduced a winter incentive package for consumers to encourage higher consumption. There are no takers, however.

Moreover, electricity consumption, even before the winter season, dropped to around 11,000MW, compared to over 40,000MW of installed capacity.

On the contrary, the energy experts have urged the government to facilitate the immediate transition of Captive Power Plants (CPPs) to the grid system. These recommendations came from energy experts at a conference titled “Energy Priorities in Crisis: Navigating Gas Supply Cuts to Captive Power Plants in Pakistan,” organised by the Institute of Policy Studies (IPS). It was convened to analyse the government’s commitment to the International Monetary Fund (IMF) to phase out gas supplies to CPPs to optimise energy resources.

Whatever may the wisdom of energy experts be in their recommendations, it is absolutely unacceptable to further increase the installed capacity on the grid with CPPs loading when there are no takers and there is already a huge surplus power on the grid. This would only further burden the existing consumers.

Import of oil from Russia plan still lacks clarity. Pakistan and Russia are actively negotiating the structure of a deal for the import of Russian oil by Pakistan amidst concerns about potential secondary US sanctions on such transactions, Musadik Malik is reported to have stated this week.

In a media talk, he said he could not disclose the oil price from Russia as such deals’ structure involves multiple factors such as insurance, re-insurance, shipping line, size of the ship as Pakistani seaports are not catered for big ships. He categorically denied media reports that claimed that Pakistan had reached a deal with Russia to import crude oil at a discounted rate.

On the contrary, India, in the meantime, went past the US sanctions and imported tons of crude oil from Russia at a discounted rate, refined the oil and re- exported it to Europe. Today, India is the biggest supplier of refined oil to Europe as the continent, on account of the Ukraine war, cannot source it directly from Russia. Such is the diplomacy and national sovereignty when it comes to “national interests above all other interests “.

The condition of IMF to rope in agriculture income in the tax net appeared promising in enhancing the tax collection. This does not appear to be happening.

Finance Minister Muhammad Aurangzeb this week expressed dissatisfaction with three provinces’ delay in passing new agriculture income tax laws. This new legislation is one of the conditions agreed upon with the International Monetary Fund as part of the 37-month $7 Extended Fund Facility.

The finance minister is reported to have expressed dissatisfaction with the poor pace of adopting agricultural income tax legislations by Sindh, Khyber Pakhtunkhwa, and Balochistan. Punjab is the only province that has enacted the bill through its provincial assembly. It’s a long way when the bill will turn into law and the revenue starts supporting the tax net.

Undoubtedly, there is a significant progress, both on fiscal and current accounts, which is showing surpluses and could lead towards a sustainable point.

The country’s foreign exchange reserves have improved from two weeks of import cover to now 2.5 months and it has been projected by the finance minister that:

“If we stay on this trajectory by the end of this fiscal year, we will be at 3 months of import cover, which will be a good place to be in terms of international benchmark,” he stated

The minister shared that the inflation rate declined to 4.9% in November 2024, the lowest in 78 months.

Addressing monetary policy, he stated that while interest rate decisions remain under the central bank’s purview, there have been positive developments in market rates.

“The 6-month KIBOR has dropped below 13%. Large corporates are actually borrowing in single digits, so we are moving in the right direction,” the minister said.

Having achieved some milestones on the fiscal end will not move the country out of its economic crisis. The challenge remains on the revenue generation side, which is key to turn around the state economy.

The industry of the country is confronted with unfeasible cost of doing business, the real estate is bogged down with tax structure, which has slowed down transactions in the market, whereas, the agriculture sector is still nowhere near the tax net. These are challenging and complex issues which the government of the day needs to address without any further loss of time.

Copyright Business Recorder, 2024