Clearing the minefield

Pakistan’s socio-economic problems have assumed cancerous dimensions – and the road to recovery is now a minefield. Clearing the minefield, rather than skirting it like past governments, is the only way to prevent Pakistan from falling off the cliff. People have high expectations of the incoming new government; and all post-election signals from the PML-N leadership are promising.
The first real test will be whether in his inaugural address to the nation, the prime minister announces a timetable for the difficult reforms necessary for economic recovery, especially those needed to overcome the energy and fiscal crisis.
Addressing the energy crisis will require many unpopular decisions that will need to be taken to restore financial viability, enhance capacity and improve governance. The new PM’s inaugural address should include a few important actions.
First, there need to be tough new laws on power theft and an aggressive programme of disconnections, fines and jail terms for the larger fry stealing from us. Unless a few dozen such people and the complicit staff of the power distribution companies (Discos), are sent to jail in the first 30 days, this theft reduction programme will not succeed.
Second, all overdue public sector money should be recovered through immediate budgetary adjustments and establishing tough penalties for senior staff of defaulting agencies.
Third, all gas and electricity subsidies should be removed, except for the poor, over a two-year timeframe. Pakistan can no longer afford unnecessary subsidies in the power sector. The public will have to be informed that the country is heavily dependent on expensive imported energy, and that higher tariffs will continue till the energy generation mix is changed dramatically – which will take around 7-10 years.
Fourth, within 30 days of government gas from CNG and fertilizer should start being diverted to the power sector.
Using domestic gas for power generation will reduce both cost of generation and the import of very expensive fuel oil. While fertilizer will have to be imported, Pakistan would still be saving hundreds of millions of dollars annually by importing fertilizer rather than expensive fuel oil.
As a minimum, within 30 days, rates charged to fertilizer factories for feedstock should equal those handed to IPPs, and rates charged to CNG stations should be such that CNG price is not lower than petrol. Fifth, all legal and administrative hurdles to awarding LNG import contract should be removed within 30 days, and an aggressive programme to switch generation from expensive imported oil to cheaper imported coal should be initiated.
Overcoming the chronic fiscal crisis will require deep tax and expenditure reforms, and restructuring and privatisation of state-owned enterprises (SOEs).
The inaugural address must also cover actions to be taken to increase taxes. These include the imposition of VAT in all sectors including at retail level; withdrawal of all exemptions and concessions of income and sales taxes and custom duties; income tax on all foreign income over, say $25,000 annually – starting at a low rate initially.
To increase taxes the NFC Award will also need to be revised to get provinces to raise their own taxes. A deep overhaul of the Federal Board of Revenue (FBR) will also be needed.
The FBR will also be required to issue presumptive income tax notices to all electricity and gas consumers with monthly bills over Rs20,000. This one action could bring into the tax net several million new taxpayers. The FBR should also be legally required to annually audit the tax returns of legislators and senior civil, military and judicial officials. This could help set the tone at the top. Where agriculture and foreign sources are a major share of the income, an annual audit should be conducted then too. This could plug a major avenue of evasion.
In respect of public expenditure reforms, the incoming PM’s inaugural address must announce the new government’s intention to take a few substantive actions within the first 100 days: (i) wrap up all non-essential government departments and agencies; ( ii) reprioritise development expenditures to shut down all low-priority projects and shift resources to energy projects; (iii) eliminate all current subsidy programmes, and compensate the poor through the Benazir Income Support Programme; (iv) eliminate the PM’s special programmes and all public-works grants given to legislators; (iv) enhance scrutiny by civil society, make all economic decisions and project approvals public information; and (v) eliminate entrenched ‘entitlement culture’ at the taxpayer’s expense which has resulted in perks and privileges being awarded to elected representatives and civil, military and judicial officials – much more than what the country can afford.
One way to do this could be a new policy that official cars for ministers and senior civil, military and judiciary officials will not exceed 1300cc. Only one official car could be provided to one public official and there could also be a complete ban on provision of vehicles owned by SOEs to ministers and civil servants. In fact disposing off government and state corporation owned luxury cars and jeeps might also make sense.
Another area that needs immediate attention is reforms within state-owned enterprises (SOEs), like PIA, the PSM, Discos, the OGDC, the Railways, NLC, etc,. These enterprises have led to Pakistan’s bankruptcy. As long as they remain under government control, they will also remain terminally sick. The inaugural address must include the following actions: (i) intent to privatise all SOEs within two to three years; (ii) removing all SOEs from control of line ministries within 30-60 days, and inducting new private sector boards and senior management through a transparent process. At the same time the boards and the management must be empowered to right-size and get rid of corrupt staff; and (iii) send a clear message to unions that the government will not tolerate any actions to block SOE reforms and privatisation.
These actions will clear the deck of most of the distortions and poor policies that have led to the acute energy and fiscal crisis. While many other reforms will be required to get Pakistan back on the road to recovery, overcoming the energy and fiscal crises is critical. Band-Aid solutions are no longer an option, and half-hearted reforms will only yield half-hearted results. Hopefully the incoming government will be prepared to walk through the minefield and implement the above-noted actions.
The writer is a former operations adviser at the World Bank.
Email: fffhasan@gmail.com