Man­ag­ing the econ­omy

The Pak Banker - - FRONT PAGE -

As PTI govern­ment has de­cided to go for a bailout pack­age from the In­ter­na­tional Mone­tary Fund ( IMF), a rise in power tar­iff looks in­evitable. The ob­jec­tive of a raise in rates is to achieve full cost re­cov­ery, a stan­dard mul­ti­lat­er­als' con­di­tion­al­ity de­signed to min­i­mize sub­si­dies and re­duce the bud­get deficit. There is no ques­tion that the coun­try is at present in the throes of an un­sus­tain­able bud­get and cur­rent ac­count deficits and any at­tempt to achieve full cost re­cov­ery with re­spect to a util­ity would go some way in achiev­ing eco­nomic sta­bil­ity.

In this con­nec­tion, two fac­tors are im­por­tant to con­sider. First, the Sup­ple­men­tary Amend­ment Fi­nance Act 2018 does not deal with sub­si­dies and one is com­pelled to look at the un­re­al­is­tic bud­get pre­sented by the for­mer Ab­basi govern­ment in April 2018, dis­missed at the time as pre- poll rig­ging, to as­cer­tain to­tal sub­sidy al­lo­ca­tion for the cur­rent year. The April bud­get en­vis­aged 174 bil­lion ru­pees in to­tal sub­si­dies with 134 bil­lion ru­pee sub­si­dies to Wapda/ Pepco and an­other 15.4 bil­lion ru­pees sub­sidy to K- Elec­tric. Thus the sub­sidy to the en­ergy sec­tor was sub­stan­tial has been his­tor­i­cally sub­stan­tial, and there is no in­di­ca­tion as to what mea­sures, if any, the cur­rent govern­ment is con­sid­er­ing in this re­gard.

Se­condly, a re­peated pledge made by Prime Min­is­ter Im­ran Khan and the Fed­eral Fi­nance Min­is­ter Asad Umar is that any mea­sures that raise util­ity tariffs and/ or taxes would be lim­ited to those with abil­ity to pay and not passed onto the vul­ner­a­ble and the poor. While few would chal­lenge this praise­wor­thy ob­jec­tive yet the fact of the mat­ter is that it would be ex­tremely dif­fi­cult if not outright im­pos­si­ble to con­tain the ef­fect of a rise in tariffs to those who can af­ford it or on do­mes­tic prices as and when the in­ter­na­tional price of crit­i­cal im­ports, par­tic­u­larly crude oil and its re­fined prod­ucts, rises. Granted that the govern­ment can im­ple­ment mea­sures that would en­sure that the sub­sidy tar­geted to the poor rises in di­rect pro­por­tion to the tar­iff raise; how­ever a rise in elec­tric­ity tariffs, a ma­jor input for all pro­duc­tive sec­tors of the econ­omy, would im­pact on the gen­eral price level whose ef­fect can­not pos­si­bly be lim­ited to those who have the abil­ity to pay.

At the same time, the govern­ment has de­cided not to pass on the elec­tric­ity rate rise on five zero- rated in­dus­tries - tex­tiles, leather prod­ucts, sur­gi­cal goods, sports and car­pets - with the ob­jec­tive of en­sur­ing that ex­ports are not im­pacted. This is a good de­ci­sion, car­ried over from the pre­vi­ous ad­min­is­tra­tion, but this would hope­fully re­duce the strain on the ris­ing trade deficit and on the cur­rent ac­count deficit but is un­likely to limit the ero­sion of the dis­pos­able in­come of the com­mon man. As mat­ters stand to­day, the April bud­get's in­fla­tion fore­cast of 6 per­cent is ex­pected to be sur­passed with the IMF pro­ject­ing an in­fla­tion rate of 7.5 per­cent for the cur­rent year, be­cause of the de­ci­sion of the US to im­pose sec­ond set of its sanc­tions on Iran and the more re­cent tur­moil in the oil mar­ket af­ter the Khashoggi in­ci­dent. It is feared that in­ter­na­tional oil prices would main­tain their up­ward trend in the im­me­di­ate fu­ture at least. Se­condly, tax on petroleum prod­ucts is easy to col­lect, though it is an indi­rect tax whose in­ci­dence on the poor is greater than on the rich, and pend­ing re­forms in the tax struc­ture rais­ing taxes on petroleum and prod­ucts has been tra­di­tion­ally the eas­i­est and the quick­est way to in­crease rev­enue. The govern­ment needs to make some re­al­is­tic as­sess­ment of what mea­sures need to be taken, what their im­pact would be on key macroe­co­nomic in­di­ca­tors and at the same time be­gin to im­ple­ment re­forms in the power and tax sec­tors im­me­di­ately.

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