Troubling miscalculations

A person who consumes his whole monthly income in less than two weeks would not only be considered as irresponsible and short-sighted but treading on a path leading straight to bankruptcy. Governments and other entities indulging in such profligacy could also meet the same fate. This is exactly what seems to have nearly happened to the power sector in Pakistan.
According to a news item in Business Recorder on 27th December, 2012, the domestic power sector has consumed the entire budgetary allocation of Rs 170 billion provided for 2012-13 during the first five months of the current fiscal year (July-November, 2012). To be more accurate, Rs 169 billion has so far been released to the power sector as against the provision of Rs 120 billion for Wapda and Pepco and Rs 30 billion for KESC for the whole year.
The prospects for the remaining part of the year are also very discouraging due to a dangerous decrease in hydel power generation on account of low availability of water in rivers and higher reliance on thermal generation in the next few months, which would require additional subsidy. It may be recalled that this was not the first time that a huge miscalculation was made in the level of annual power sector subsidy. During FY12, subsidy to Wapda/Pepco and KESC was projected at Rs 122 billion and Rs 24.59 billion but it actually amounted to Rs 419 billion and Rs 45 billion respectively or more than three times higher than the original estimates.
The unfolding situation on the power sector subsidies is indeed distressing for a number of reasons. To use very mild words, the inability of the fiscal authorities to project the losses and the amount of subsidy required for the power sector is astonishing, given their experience over a number of decades. The amount of losses would ordinarily depend on the degree of success of some serious reforms promised to be undertaken in the power sector including the increase in the level of tariff, likely decrease in theft and line losses, change in the power generation mix, and the ability of the power companies to collect the bills from powerful consumers, including the government departments. The fact that no satisfactory progress has been made in the past so many years and government is too weak to demonstrate the necessary will to make bold moves in these areas suggests that the amount of losses as well as subsidy would continue to increase to unsustainable levels. There was a proposal to adjust the outstanding dues of the provincial governments through fiscal adjuster but even such a simple proposal appears to be difficult to implement. Power companies even hesitate to send their teams to remove kundas in certain areas due to safety problems. There is no point in stressing upon the inadequacies of the system and the need to remove them at all costs to ensure smooth/proper cash flows of the power sector companies but the economic managers should at least have the spirit to realise the difficulties in confronting the glaring challenges in the energy sector and estimate the losses on a more realistic basis. We can understand the reasons of small difference between the projected and actual amount of losses during a particular year but such a vast divergence between the two is simply mind-boggling and unjustified. Its impact on economic management of the country would be disastrous. Fiscal deficit for the current year is now estimated to be well over 8 percent of GDP by most of the economic analysts and multilateral financial organisations as against the original projection of 4.7 percent of GDP. According to the latest reports, fiscal authority has already borrowed Rs 586 billion from the scheduled banks during the first five months of the current fiscal year and piling up of banks' money into government paper has touched a new peak of Rs 3.333 trillion at the end of November, 2012. This is certainly an indication of excessive fiscal deficit and it is not difficult to guess that this unhealthy development would have hugely negative consequences for the economy in terms of prices, exchange rate, debt servicing in future, etc. In our view, such an attitude shown by the fiscal authorities is highly regrettable, to say the least and should be avoided at all costs. With such managers at the helm in the private sector, the business organisations would have gone bankrupt and closed their shops long ago but fiscal authority has the luxury to camouflage its ineptness and miscalculation by printing more currency notes. The cost of such a deliberate miscalculation or indifferent behaviour of the policymakers towards the economy is obvious. In other countries, such absurdities are not easily tolerated and fiscal managers have to face the wrath of the masses and the parliament for such blunders.