EDITORIAL: The Punjab government’s decision to reduce electricity bills by 14 rupees per unit for those consuming between 201 and 500 units in Punjab for two months at a cost of an unbudgeted 45 billion rupees to the provincial treasury - or around 15 percent of the budgeted provinces own resources of 294 billion rupees.
This announcement came in the wake of not only National Electric Power Regulatory Authority’s (Nepra’s) decision a week before to increase tariffs by 2.56 rupees per unit, under fuel adjustment charges, a decision reflective of the staff-level agreement reached on 12 July 2024 with the International Monetary Fund (IMF) under the 7 billion dollars Extended Fund Facility (EFF) programme pending approval by the Board subject to meeting certain ‘prior’ conditions, but more cogently taken in the wake of rising public discontent at the higher inflation that accounts for an increasing number of low middle to middle income earners unable to meet their kitchen budgets.
The income erosion of the general public - excepting 7 percent of the total workforce which is paid at the taxpayers’ expense that has been insulated against inflation through receiving pay raises well above the inflation rate - is largely due to administrative measures with respect to achieving full cost recovery by utility companies agreed with the IMF.
The press release uploaded on the Fund website notes that “provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax.
On the latter, all provinces are committed to fully harmonizing their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025. …Restoring energy sector viability and minimising fiscal risks through the timely adjustment of energy tariffs, decisive cost-reducing reforms, and refraining from further unnecessary expansion of generation capacity.
The authorities remain committed to undertaking targeted subsidy reforms and replace cross-subsidies to households with direct and targeted BISP support.”
The announcement by the PML-N supremo, Nawaz Sharif, meets neither of these conditions as: (i) at present, the total budgeted federal subsidy to the power sector is a little over 1.6 trillion rupees inclusive of federal equalization subsidy that requires an urgent revisit after Wapda unbundling; the privatised K-Electric is budgeted to receive 174 billion rupees and a provincial subsidy to K-Electric would further compromise the federal government’s objective to raise efficiency through privatisation of Discos – a factor that must militate against the same measure being taken by the Sindh government; (ii) it is unclear which expenditure item would be cut to finance the 45 billion rupees for the subsidy though it is doubtful that the Punjab Chief Minister’s other freebie schemes, laptops and scooters for women students, would be affected, and, importantly, whether it will have an impact on the budgeted 630 billion rupees Punjab provincial surplus agreed with the federal government and the Fund; (iii) it was agreed with the Fund that subsidies must be targeted through Benazir Income Support Programme, which is not the case here and which would no doubt generate considerable concern amongst multilateral and bilateral donors; and (iv) the Punjab budget for the current year raised the target of own resources by 25 percent from the revised estimates of last year, against 30 percent from what was budgeted last year, showing a propensity to overstate resources, but farm income tax as a source of revenue is budgeted at the same rate as last year, with a whopping 79 percent reliance on federal transfers, the highest amongst all provinces.
In addition, it has to be acknowledged by the federal and provincial governments that inflation is also fuelled by large budget deficits incurred by the centre and the provinces funded routinely by borrowing either domestically or internationally.
This measure, without doubt, can be categorised as populist political gimmickry, with the capacity to inflict much damage on the national as well as the provincial economy, and by putting pressure on other provinces that have desisted from this economically unfeasible measure to follow suit.
The IMF, too, would be interested to know what impact this measure would have on the generation of surplus by the Punjab government envisaged in the federal budget and if there would be no impact on the provincial surplus then where will the money come from?
Copyright Business Recorder, 2024