As expected, the government responded promptly to Dr Hafiz Pasha’s views expressed recently in a seminar on the woes of the economy because distortions pointed out by unbiased experts strengthen doubts about the government’s policies and its strategy for reviving the economy. However, that response (political, not logical) was unconvincing because it denied the ground realities.
The government handout said that Dr Pasha’s assessment was “based on inaccurate facts and figures and contained assumptions dependant on future transactions without taking into account the repayment of loans.” The truth, however, is that part of the last IMF loan has been repaid by fresh borrowing from the IMF, not from domestically-generated sources.
The response rightly stated that the present government “inherited challenges including large fiscal deficit, unfavourable balance of payment position, depleting foreign exchange reserves, limited revenue base, rising current expenditures, circular debt, energy crises, flight of capital, and shaken investor confidence.” But borrowing isn’t the key remedy; it calls for much more.
Indeed “borrowing is beneficial for economic development of a country as long as it is undertaken to facilitate a well thought out roadmap devised with due diligence.” But did we do that? Was it wise to ignore BMR (balancing, modernisation and replacement) of the existing power generation base so that it begins delivering optimally, instead of going for new, debt-financed projects?
Sadly, this wasn’t prioritised, for reasons best known to the government. After the focus shifted to the RPPs, BMR of the existing power generating units, especially hydro-power units, was ignored for two decades – a tragedy wherein all regimes since 1994 have a share. The present regime is making it worse by ignoring this vital aspect while going for new projects.
The stance that “that there is no overall debt increase” and with external financing the government “off loaded proportionate domestic debt,” is incorrect because domestic as well as external debt has risen, as shown by the government’s own statistics, and the logic that external debt is preferable since (compared to domestic borrowing at 12 percent per annum) it carries “minimal interest rates”, is only partly correct.
Praising “minimal interest rates” overlooks that high external debt worsens the country risk perception, whose cost is paid by businesses via high-risk cost included in the bank charges. The latest Global Competitiveness Report shows that, for the fourth consecutive year, Pakistan’s competitiveness went down; its global 101 ranking in 2010-11, went down to 133 among the 148 ranked countries.
Insisting that Pakistan will repay “over $30 billion [$52 billion according to Dr Pasha] in the next 10 years while maintaining sufficient exchange reserves” is overoptimistic. Unless Pakistan’s exports pick up, maintaining exchange reserves besides retiring external debt will be difficult. Ignoring a revamp of the existing power generation base while a new base is built, foretells prolonged misery for the export sector.
During the last week, LCCI and SCCI published appeals in newspapers pointing to how non-payment of Sales Tax Refunds, gas and electricity supply falling to 40 percent, and rapid appreciation of the Rupee without a minimum 10 percent compensatory export rebate for at least three months, are forcing the industry to downsize, and lay off workers.
The only stance that made sense was that the $30 billion (or is it $52 billion?) loans “would be disbursed over next 3 to 7 years and won’t form part of public debt today”, and prevent “violation of the Fiscal Responsibility and Debt Limitation Act-2005.” But the huge sum being borrowed has to be repaid, which calls for massive infrastructural and regulatory reforms.
But this won’t happen because in the 2013-14 budget, IMF had reduced the revenue target to Rs 2,345 billion from Rs 2,475 billion by slashing the federal PSDP by Rs 120 billion. According to Dr Pasha, in 2013-14, provinces stopped development outlay despite generating cash surplus of Rs 200 billion. Now, setting 2014-15 revenue target at Rs 2,275 billion, foretells further slashing of the PSDP.
Surprisingly, the government response didn’t deny Dr Pasha’s claim that only 700MW was added to the power generating capacity (not 1,700MW, as claimed by the government). On May 10, the PM asked, and the Ministry of Water & Power committed to add (the claimed but not added?) 1,000MW to the system in 24 hours. Was this capacity lying idle, or a miracle is expected?
The day the government response was published, in a TV talk show, Dr Musaddiq Malik, Special Assistant to the Minister of Water and Power, revealed that, for the first time, the government has worked out a formula that accurately relates furnace oil consumption to the power units to be generated there from, and has devised a discipline for not over-paying the RPPs.
Doesn’t it confirm the rumours that RPPs aren’t billing the state fairly, and partly explains the reason for the periodic ballooning of the ‘circular debt’? Isn’t it odd that no PPP or PML-N regime thought about developing this system for RPP bill scrutiny, although Pakistan started relying excessively on oil-based RPPs since 1994 (courtesy Asif Zardari’s ‘vision’).
Dr Malik evaded questions pointing to the miserable performance of state-owned power generating units. His explanation that these units are like sick old men beyond recovery who, at best, can be taken for a walk in the gardens, was amazing. If the message was that these units have become junk, then why keep them, and that too overloaded with manpower?
Talking of vision, except for the regime led by General Ayub Khan, none realised the importance of the fact that, given the scarcity of oil reserves and the fact that oil-fired power generation plants add to pollution, the logical course for a developing country like Pakistan was to build more dams to store water for year-long use by its agriculture sector, and also generate electricity from these dams.
Dr Atta-ur-Rehman is forthright in saying that opting for rental power was a crime against the country, and those who opted for RPPs should be taken to task. While the oil price has increased almost eight times its level in 1994, now 54 percent of the electricity generated in Pakistan is fuelled by furnace oil; it speaks volumes about the vision of the PPP and PML-N leadership.
The seminar rightly proposed that, compared to 30 percent of the 2013-14 PSDP being allocated for building dams and revamping the existing power generation base, in 2014-15 at least 50 percent of the PSDP must be earmarked for these two sectors. Besides, merely allocating funds isn’t enough; they must also be spent judiciously, unlike 2013-14 when only 34 percent of the federal allocation was actually spent.A B Shahid, "Denying the ground realities," Business recorder. 2014-05-13.
Keywords: Economics , Economic issues , Economic policy , Economic system , Economic growth , Economic development , IMF loan , Energy crisis , Pakistan