Subsidies and IMF

The staff level agreement reached between the International Monetary Fund (IMF) and Finance Minister Ishaq Dar contained the standard normal IMF condition: "untargeted subsidies that disproportionately benefit the well-off will be phased out while protecting the most vulnerable members of society through targeted assistance." Big words normal in IMF and donor government agreements and press briefings but what would this mean for the vulnerable and in the larger macroeconomic context? Subsidies, during the past decade or so, have typically been extended to the power sector and for government commodity operations.
During the past three fiscal years, the former PPP-appointed Finance Minister Dr Hafeez Sheikh excluded debt consolidation of commodity operations and power sector subsidies while calculating the fiscal deficit as well as routinely and deliberately overestimating the revenue collection target especially during the last few weeks before the end of the fiscal year. Unfortunately, the 2013-14 budget documents do not make it clear whether commodity operations and power sector subsidies were included in determining the deficit for 2012-13, which was budgeted at 208 billion rupees with revised estimates for the year being well over double this amount. Dar did interfere in 2012-13 data on two counts. First, he implemented the one percent rise in general sales tax announced in the budget effective from 13th June which would raise revenue for 2012-13 while at the same time he increased expenditure by 322 to 340 billion rupee - the amount used to retire the inter-circular energy sector debt to the Independent Power Producers (IPPs) with the objective of raising the operational capacity of the generation companies and thereby reducing loadshedding.
The government instructed the banks to remain open on Saturday 29th June to complete the transaction in fiscal year 2012-13 which ended a day later. There is no doubt that the revenue earned from the GST levy a day after the budget speech would be considerably less than the release to the IPPs. These two interventions in 2012-13 explain why the revised fiscal deficit was budgeted at 8.8 percent for 2012-13 instead of 7.7 percent announced in the Economic Survey released just a day before the budget with the two obviously un-reconciled statistics inexplicably revealed by the same man: Dar. Given this background if Dar thought he was being clever (chalak) then he needs another think as the much hyped deal does not include a plan to forestall the re-emergence of the circular debt; according to the Special Advisor to the Prime Minister on Water and Power and the 2013 caretaker Federal Minister for Water and Power Musaddaq Malik the circular debt began to accumulate the day after the debt to the IPPs was retired and the Ministry sources have projected an inter-circular debt for 2013-14 at between 400 to 500 billion rupees. It may be recalled that Shaukat Tarin as Finance Minister had also parked the bulk of the circular debt in a Power Holding Company but was unable to convince his cabinet colleague, the Water and Power Minister, to begin the politically challenging structural reforms that would have ensured that the circular debt did not begin to re-emerge the day after the debt was retired. Are these structural reforms within the energy sector any different from those supported by the PPP-led government? The answer unfortunately is in the negative. Reducing line losses and theft are the short-term solutions coupled with raising tariffs to eliminate the subsidies that allow the government to meet the shortfall between cost and tariff estimated at 3 rupees per unit.
The PPP government was unable to compel the large federal and provincial government defaulters (including industrialists and large commercial ventures) to clear their bills and did not begin to cut the amount at source; however, it did raise tariffs much to the chagrin of the general public. The PML (N) government has begun to apprehend thieves and defaulters but it has to begin to cut the federal and provincial government departments/ministries bills at source otherwise not much will change in the short-term. The continued heavy loadshedding reveals that not much has to change despite claims of higher generation than last year. One would assume that the Fund staff picked up on these chalakis which led to an extension in the talks by a week. Dar though may have admitted to the Fund staff, though he hasn't to the public, that the data juggling would allow him to meet the deficit target reduction of 2.5 percent in this fiscal year. An item titled grants/subsidies and write off loans contained under Object Classification with Expenditure reveals a budgeted outlay of 799 billion rupees, a reduction of roughly 100 billion rupees from the 896.9 billion rupees revised estimates of 2012-13. The budgeted amount for this year compares less favourably with the budgeted amount of last year given a difference of 74 billion rupees. It needs stating that the budget is grappling with a trust-deficit because the government in power has invariably overstated revenue and understated expenditure particularly current expenditure. Some adjustments in the past were made through (i) reducing a large outlay on development expenditure while during the budget speech the Finance Minister of the day, (including Dar) crow about his party's commitment to development, (ii) an understatement of current expenditure, particularly allocation for subsidies, which is revised upward during the year; and (iii) lower than budgeted revenue collections which are revised downward during the year. Last year, the budgeted collections were revised downward three times. Be that as it may, during the past five years the budgeted reduction in subsidies has never been achieved due to street protests that turn violent as loadshedding and price of essentials rise. A little over one month after the budget was released there are indications that an unsatisfied citizenry may need to be appeased through higher subsidies to ensure that civil protests do not spread throughout the country.
Dar is highly susceptible to political criticism and a case in point is his quick withdrawal of the budgetary decision not to raise public sector salaries this year by announcing a raise of 10 percent, the only economically good decision that he had taken in the original budget. He has so far resisted criticism by the general public for the obvious reason that he has no constituency other than his party leader.
However, Nawaz Sharif owes his prime ministership to the people of this country and given the 2013 election results he must be extremely sensitive to public perceptions. One would assume that Nawaz Sharif reckons he has three to four years out of a five-year term to take unpopular decisions and is no doubt hoping that the economy would have turned by then. If Dar fails to deliver, which seems likely given the flawed budget then the Finance Ministry will be directed to change policies by Nawaz Sharif as the general elections begin to loom on the horizon.