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The economics of shortages

Shortages that presage a raise in the price of a commodity have become a way of life in Pakistan – shortage of electricity, shortage of gas in the winter months, shortage of food items, shortage of medicines, shortage of other daily use items.

To ascertain who is responsible is a function of the sub-sector being considered. Government controlled utility sectors, particularly electricity and gas, have been subjected to a periodic rise in tariffs due to sustained poor performance for decades which, sadly, is continuing to this day. The energy sector’s inter-circular debt has risen to 2.3 trillion rupees (from 1.2 trillion rupees that was inherited by the Khan administration) piled up as a consequence of rising receivables attributed to theft by the private sector as well as non-clearance of bills by several public sector entities. This debt fuels severe liquidity shortages compelling the government to not only: (i) periodically release an unbudgeted amount to enable Pakistan State Oil to import the necessary fuel – an amount just about sufficient to meet PSO’s immediate needs and allow it to open Letter of Credit; but also (ii) to borrow from the market and park it in Power Holding Private Limited (PHPL) set up during the PPP government’s tenure. The interest on his borrowing is paid by the hapless consumers with the principal amount not cleared as envisaged to this day.

Previously, inter-circular energy debt, referred to as quasi-debt, was given an exemption in the budget from being included as public debt, no doubt based on the rationale that the payment of interest was not by the borrower, the sector/government, but by the consumers, the general public. However, this exemption is no longer allowed as per the new condition agreed between the International Monetary Fund (IMF) and Pakistan’s economic team leaders – Dr Hafeez Sheikh Advisor to the Prime Minister on Finance and Dr Reza Baqir Governor State Bank of Pakistan, with implications on the budget deficit and a consequent negative impact on national expenditure/revenue accounting.

The government claims that the rise in tariffs is due to: (i) flawed contracts signed with Independent Power Producers (IPPs) by previous administrations, including allowing capacity payments even when demand is lower than capacity especially during winter months as well as the agreed rupee dollar conversion rate. Previous administrations justify these contracts on the grounds that without such incentives no one was willing to invest in the country’s energy sector. Be that as it may, it must be appreciated that the Khan administration has renegotiated the contracts successfully and signed a Memorandum of Understand (MoU) that would become binding as soon as it releases the IPPs dues of 400 billion rupees. The MoU does not include contracts signed with Chinese companies under the China Pakistan Economic Corridor (CPEC) though reports indicate that an agreement has been reached with the Chinese that would be announced during President Xi’s visit to Pakistan. The MoU is a step in the right direction however it does not envisage a reduction in tariffs though a rise in future tariffs would be lower than would have been the case otherwise; (ii) flawed agreement with Qatar that in hindsight (which is twenty – twenty) was not a good one given the fall in the LNG prices particularly after global demand plummeted due to the pandemic. Any challenge to this agreement before 2029 when the fifteen-year agreement matures may cost Pakistan more if Qatar goes into arbitration than the differential between what the country pays as per its 2014 agreement and the current low market price; and (iii) the lack of infrastructure to vacate the fuel and consequent electricity generation capacity available.

Utility sectors are one of the highest taxed sectors in the country, with obvious implications on inflation as this is an input cost passed in its entirety to the consumers. As a case in point out of each 100 rupee electricity bill around 30 rupees is for items other than the cost of electricity. The tax structure of this country is acknowledged as being unfair, inequitable and anomalous and the Federal Board of Revenue (FBR) has shown an inability to either widen the tax net or ensure that the evaders/avoiders are brought into the tax net (identified over a decade ago by Nadra). FBR continues to rely heavily on indirect taxes and more particularly on withholding taxes (collected by withholding agents rather than FBR staff) that are imposed mainly in the sales tax mode whose incidence on the poor is greater than on the rich. Dr Sheikh is unfortunately dealing with the revenue shortfall through: (i) agreeing to an unrealistic tax revenue target with the IMF and then (ii) blaming FBR for failure to achieve these targets which accounts for the third FBR Chairman since 20 April 2019 (when Dr Sheikh was appointed as Advisor on Finance).

The IMF is reportedly insisting on full cost recovery in its ongoing discussions with the government – an economically sound recommendation though politically disastrous.

The government operated Utility Stores Corporation, targeted to provide essential commodities at subsidized rates, has been accused of corruption in the past for example selling scarce commodities like sugar to bulk buyers (hotels, bakeries) in return for some agreed amount/bribe. In recent months there have been severe shortages of some commodities and in the case of wheat the price cited is the controlled price but the quality of the atta is not fit for human consumption. One would urge the Prime Minister to get his rather large Cabinet to visit at least four to five different Utility stores daily to assess availability and quality of essential items. The Prime Minister’s frequent visits to panagahs, which are widely supported by the general public, are becoming less of a public relations coup than would a visit to a Utility store to check up on prices and availability. The government is considering merging all subsidies/cash disbursements to the vulnerable through the Ehsaas programme, a salutary objective which, when met, would resolve many issues associated with untargeted subsidies; however, today there is a need for a solution through mitigating administrative and other measures including higher subsidies.

In economic theory perfect competition conditions prevail only in commodities where the number of buyers and sellers is too large to be able to influence price or in other words price is set where demand and supply intersect. Examples include wheat, sugar, cement, etc. In Pakistan, perfect competition conditions do not prevail even in these commodities and there is some merit in the Prime Minister and his Cabinet’s refrain accusing profiteers/hoarders/smugglers/cartels and middlemen (traders and wholesalers) of being responsible for inflation. True this is not a new phenomenon and predates the Khan’s tenure however today there appears to be a more sustained effort to challenge the writ of the government relating to pricing of food items. Many maintain that this may be due to the confrontational stance taken by the Prime Minister and his team while referring to hoarders/smugglers/profiteers.

The Khan administration however does not acknowledge the contribution of its own decisions/actions on inflation including a burgeoning budget deficit and a rise in input costs (though the pharmaceutical industry was recently allowed to raise rates on the grounds of long term price control leading severe shortages in the market).

To conclude, the Prime Minister needs to tone down his confrontational stance with the private sector and be made to understand that he cannot blame a previous administration for food inflation today – twenty seven months into the tenure.

Anjum Ibrahim, "The economics of shortages," Business Recorder. 2020-11-02.
Keywords: Economics , Economic growth , Economic team , State Bank , Ehsaas programme , Economic theory , Imran Khan , FBR , CPEC , MOU

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