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Policy response to challenges

WHAT are Pakistan’s most pressing economic challenges and what is the government’s policy response? How well is the policy response aligned to addressing the challenges on a sustainable basis?

The list of challenges is long and growing, including everything from population growth to preparedness for climate change, from the low domestic savings rate to urbanisation challenges and water issues. However, looking at the immediate to medium term, the three challenges that stand out — and present themselves as political opportunities for this government if it can resolve them even partially — relate to the energy crisis, tax reform and restoring the confidence of investors. While the last of these is related to the first two, in that a resolution of the energy crisis and a more transparent and equitable tax system will help lead to the restoration of investor confidence in large part, it is important on its own as well, as there are other dimensions that need to be addressed by the government beyond energy and taxes.

Power

The unresolved power sector issues are single-handedly responsible for slowing the economy’s growth, stopping new investment, straining public finances and burdening the banking system. And yet, 18 months after assuming office, the government has precious little to show for its efforts. It is true that the losses of the sector have come down moderately, and the pace of accumulation that had touched nearly Rs2 billion a day at its peak has been brought down to more manageable levels; however, this is largely due to the steep decline in international oil prices. Were it not for this single extraneous factor, the sector would continue to bleed at the previous pace.

As pointed out by many commentators, the issues in the sector relate to governance. While relatively easier things have been done for immediate relief, the real milestones of progress such as uprooting the corrupt power sector bureaucracy through corporatisation and privatisation, modernising systems, introducing technology such as smart grid solutions, have mostly eluded the government so far.

The glacial pace of reform is understandable from one perspective. Given that electricity theft of nearly Rs100bn occurs each year, while the gas sector’s unaccounted-for gas losses are another approximately Rs200bn, the scale of theft and the magnitude of the vested interest is staggeringly obvious.

Three challenges stand out — the energy crisis, tax reform and restoring investor confidence.

In fact, a telling development that points to which side is winning in the power sector — the corrupt status quo or the reform-minded elements — is the ‘“elevation’ of the only competent technocrat in the government’s team in the power sector to the position of the prime minister’s spokesperson. He is now safely out of the way of the politicians and bureaucracy.

Tax

The government’s failure to fix the tax system is even more glaring. By making ‘tax collection’ its benchmark for success, rather than a whole-scale qualitative improvement in the system, it has given the Federal Board of Revenue a free hand to resort to ‘predatory taxation’. This is hurting honest taxpayers and damaging the investment environment in the country.

For reasons of space and importance, I will treat this subject separately in a subsequent article.

Investment

Pakistan’s private sector continues to shy away from investment. While the government is chasing new investment by foreigners, fixed investment by the country’s private sector has fallen to multi-decade lows.

The bottlenecks to new investment are not just the energy shortage or the rising tax burden. The policy environment of the PML-N government is more conducive to trading than domestic manufacturing, reinforcing suspicions about the Sharif predisposition in this regard.

In a recent meeting to evaluate the performance of the government, it is unclear if the prime minister asked any probing questions of his ministers, or not. If a ‘tick the box’ exercise was all that was intended, then it is very likely the prime minister was appreciative of the ‘Vision 2025’ document the Planning Commission had produced — which even a cursory reading makes clear why the collection of wish lists cannot be a guide for planning our immediate destiny, and that the document needs to be written professionally and competently all over again. Or, he might have been impressed with the holding of an ‘investment conference’ in the capital which attracted, against little odds, sitting ambassadors of some countries to the venue.

Being in an appreciative and charitable mood, the prime minister may not have wondered why we wanted to have foreign investors experience load-shedding first-hand, while his ministers waxed eloquent about the investment-friendly policies of the government.

Or, perhaps the intention was for potential investors unfamiliar with our handling of existing investors to meet first-hand with the sponsors of the Al Tuwairqi Steel Mills, a joint venture between a Saudi business group and Posco, the South Korean steel giant. This project, a $1.24bn investment, is meant to set up a world class steel mill outside Karachi, and was promised feedstock gas at a certain industrial tariff — a promise the government has reneged upon. This is the same treatment the government meted out a few years ago to the $1bn new fertiliser plant by Engro.

Incidentally, just last week, representatives from Al Tuwairqi and Posco stood for nearly three hours outside the Prime Minister’s Secretariat, on a particularly cold day, waiting for entry to the ECC, to which they had been invited. The agenda had been changed, without informing these poor souls who had flown from all over the place to present their case. Is this what the ‘investment conference’ was meant to showcase?

As demonstrated, the government’s response to key challenges is out of sync with what is required. If it is so desires, it can still correct its policy drift and redeem the situation. On current performance, however, that seems a tall order.

The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.

Sakib Sherani, "Policy response to challenges," Dawn. 2014-11-28.
Keywords: Economics , Economical challenges , Economic growth , Economic crisis , Economic problems , Government-Pakistan , Energy crisis , Tax payers , Bureaucracy , Democracy , Politicians , Politics , Taxes , Corruption , Karachi , South Korea , ECC