The World Bank has, according to the Minister for Water and Power, Raja Parvez Ashraf, urged the government to increase power tariff by another 20 percent from January 2009. The economic rationale for this remains obscure. The World Bank, in common with other international financial institutions, typically urge debtor nations, through sector loans linked to conditionalities, to ensure full cost recovery with respect to utilities.
Their rationale is simple: if a utility does not meet its costs and attain a reasonable level of profit, it is likely to go into debt requiring huge budgetary injections to keep it afloat. This would, in turn, impact on the budget deficit with its ramifications on major macroeconomic indicators, including the rate of inflation. Thus for the World Bank to recommend higher electricity prices a while back when the international price of oil hit the high of nearly 150 dollars per barrel made economic sense.
For the Bank to urge the government now to increase its electricity rates by another 20 percent at a time when the international oil prices have fallen by over 200 percent, to reach a level of around 50 dollars per barrel, reflects a flawed policy recommendation.
Analysts argue that if the World Bank recommendation is not dated to the time when oil prices peaked in the international market, then the only possible rationale for the proposal to raise tariffs by 20 percent is to enable the government to generate sufficient revenue to cover the subsidy allocated to the sector by the previous government. This, if true, does not make economic sense for the reason that the power sector, a major input for most industrial activity in the country as well as contributory to considerable farm output, must not be used as a revenue source simply because it is relatively easy to collect from this source.
If this 20 percent raise finds favour with the government, it is a foregone conclusion that economic activity in the country, already declining due to load shedding, would further decline and the government's capacity to increase its tax to Gross Domestic Product ratio would be severely compromised as a consequence.
Failure to meet this major International Monetary Fund (IMF) conditionality may result in, perhaps, the non-release of the second tranche of the 7.6 billion dollars stand-by arrangement recently approved by the IMF board. Thus if the World Bank is still proposing a raise in electricity rates Business Recorder would strongly urge the Bank to revisit its conditionality.
It is fairly evident that the government of Pakistan is strapped for cash and is seeking ways and means to increase its revenue. In this context, it is hoped that the government prefers to tap those sources of income that remain outside the tax net. Examples of this are the stock markets, real estate sector as well as the rich landlords. To tax the industrial sector further would only result in lower productivity, which would negate attempts by the government to attract local and foreign investors to this country - a policy focus targeted to improve the performance of our major macroeconomic indicators.
It is critical for the government, given the liquidity crunch as well as high inflationary pressures, to ensure that only those measures are undertaken that can ease the cash flow problem of corporations without any adverse effect on its own revenue. Thus, for example, tax refunds that are unlikely to be paid out must be compensated by granting exemptions from withholding tax on the import of raw materials. There is, therefore, an urgent need for the government to establish a body consisting of its own representatives as well as stakeholders to find a way to raise its revenue without having an adverse impact on productivity.