The emperor has no clothes
It is a well known fact that the energy sector in general and power sector in particular is Pakistan’s Achilles heel. The root problem of the agriculture and productive sectors of the country is the lack of cheap reliable power and energy input
The PML-N budget, presented on Jun3, also marked the completion of three years of its five years term. It was on the eve of the budget in 2013 that the new government of Nawaz Sharif was sworn in after completion of the five years of a PPP government. The nation was greatly relieved that an experienced PML-N team headed by a pragmatic businessman would quickly put the economy on the road of economic growth that had eluded the rather incompetent and corrupt management of the PPP government.
Economic growth is the cornerstone of employment generation for the youth of the country, who were hoping for a big leap forward in employment opportunities and prosperity. Unfortunately after lapse of three years the promised growth and prosperity has not materialised. The PPP government, which managed an anemic average yearly GDP growth of around 3pc, has been followed by an equally anemic PML-N average score of around 3.5pc. This dismal performance, in spite of the unexpected dividend of a phenomenal decline in global oil prices, has been a major disappointment. The combined average of the PPP and PML-N growth rates of under 4pc shows an abysmal performance of both parties.
■ Why is growth so important? Early this year Sri Mulyani Indrawati, VP for South Asia at the World Bank, in a speech at the HEC in Islamabad said that, “for the past two decades, Pakistan’s growth rate has been half of India and China. If current trends continue by 2050, India’s economy will be 40 times larger than Pakistan’s”
The consequences of the above prediction will prove to be catastrophic for Pakistan. It would indicate a total failure of an effective state. Moreover, apart from the link between growth and employment generation, there is also a direct relationship between defense expenditures and the size of the economy, a weak economy would directly imperil our national security. To avoid this undesirable situation it is crucial that Pakistan matches Indian economic growth rates point for point, year in year out until 2050. While we roughly matched Indian growth rates from 2004 to 2008, our growth collapsed during the PPP regime and has not recovered even after the PML-N took over the government in 2013. On the other hand Indian growth has been steady since 2008 and the latest quarterly growth of 7.9 percent is twice our growth rate. The message is clear for us; implement a strong economic reform agenda and deploy a superior economic management system if we have to stay ahead of the Indian challenge. Unfortunately, PML is oblivious to this challenge.
Let’s take a look at our recent performance. The economic survey has clearly indicated that Pakistan’s agriculture and the export sectors are in a serious crisis. Due to the sudden drop in oil prices deflation is plaguing the global economy. Particularly hard hit is the commodity sector. The global prices of agriculture produce have collapsed in the face of declining cost of agricultural production and competitive pressures have intensified manifold. In this scenario our neglect of the agriculture sector has come home to roost. By not passing on the full benefits of lower oil prices to the producers we have sharply exacerbated the situation. The result is a sharp decline in output of the agricultural sector.
The budgetary concessions announced in the recent budget are a bit too little too late. Diesel is still a highly taxed input. We have not built any water reservoirs in the last forty years, the rural economy is caught in a devastating alternating cycle of drought and massive floods. Couple this with the failure of not inducting BT cotton, provision of poor extension services, continuation of poor farm management and slow induction of modern technology the malaise is apparent and impact is devastating. Our yields are amongst the lowest in the world and costs are among the highest. Clearly a recipe for disaster.
For the wheat crop our official procurement price is around fifty percent higher than world prices primarily because of high cost of production and low yields achieved by our farmers. It is obvious that only wheat and sugarcane supported by high procurement and support prices on the backs of the poor consumers will survive while export crops like rice and cotton will be internationally uncompetitive and hence perish. A comprehensive plan for revitalising a competitive and productive agricultural sector is unfortunately conspicuous by its absence in the government’s outlook.
There are twenty three million acres of arable land waiting irrigation (in Thar, in eastern Sindh, in eastern Baluchistan, in southern Punjab and southern KP). Budgets of the last nine years have shown meager allocations for irrigation projects and these areas continue to be barren and desolated. President Pervez Musharaff started the Rainee and Thar Canal projects to bring irrigation to eastern Sindh but the PPP government in its wisdom or lethargy never finished the projects, meanwhile the children of Thar continue to pay with their lives. The neglect of the water sector continues by the PML in spite of the minister of water and power dire prediction that the water crisis will surpass the power crisis.
As far as the export sector is concerned all that the budget could do was to go back to the Musharaff era of zero rating of the five export segments. Yet the neglect of the export sector has not been addressed. Ironically it was the PPP government that abolished the zero rating scheme under pressure from the FBR without establishing a viable alternate. The issues of productivity and competitiveness of the Pakistan economy particularly of the export and agriculture sector have not been addressed by successive governments.
Governance reforms are direly needed. In 2007 Pakistan’s rank in the Global Competitiveness Index was 91. After the five years of PPP and three years of PML-N government the rank has deteriorated by approximately 40 positions. Similarly in the ease of doing Business index, the rank of Pakistan in 2007 was at 60, while now it has deteriorated by 70 positions. These two global rankings reflect the state of our economic governance. The sharp decline set into motion by the PPP government in 2008 has not been put into reverse by the PML government. Sound economic governance continues to elude the government by deliberate inaction and not because of trying.
It is a well known fact that the energy sector in general and power sector in particular is Pakistan’s Achilles heel. The root problem of the agriculture and productive sectors of the country is the lack of cheap reliable power and energy input. The PML-N’s best and influential brains were put on the task. The team included Sharif family led by Shahbaz Sharif and sons, khwaja Asif, Abid Sher Ali the talented nephew and Mussadiq Malik, who spearheaded the drive for fixing the sector. After three years of bombastic claims we find out that the PML-N power team has taken Pakistan to the cleaners, as the power crisis comprising high price and poor supply has aggravated. The issue facing the nation for the last decade remains unresolved. The question is whether Pakistan will get adequate and cheap power to drive its growth? And that remains inconclusive. The answer is increasingly a big no; it seems the PML is hell-bent on mortgaging the country to the most expensive power for the next thirty years.
Few weeks ago we got the jolting news that the Mexican government has just awarded a tender for power to its national grid at four cents per kwh. Only last week the UAE awarded a similar contract at 2.99 cents of clean green solar power. In contrast we are in hot pursuit of installing power at exorbitant prices. To put it in proper perspective, take the example of the power plant being installed at Port Qasim by a Qatari company for supply at a price of 8.5c per kwh. The 4.5c tariff differential above what Mexico contracted for will ultimately cost the Pakistani consumer $300 million every year in higher tariff payments for the next 30 years. When we consider that Nandipur power will cost us 11c per kwh, Thar power at 12c per kwh, and Bahawalpur solar power at 15c per kwh the picture becomes very alarming. Add to these projects the 15,000 mw coal capacity which the government wants to pursue under CPEC at 8.5 c per unit, the extra bill to the people of Pakistan could amount to as much as $5 billion a year. This kind of power regime in Pakistan is designed to suck out the juice from not only our people but also from the productive sectors of agriculture and manufacturing for the foreseeable future.
As the power sector mess demonstrates, the entire government machinery from the ministry of water and power to the private power infrastructure board and the regulator NEPRA is either incompetent or are accomplices in ripping off the country. The story of LNG is also of major concern. The agreement with Qatar is hidden in a shroud of secrecy, all we can gather is that it is a take or pay contract for fifteen years with the price connected to the price of Brent oil. The current spot price for LNG is under three dollars per mmbtu while newspaper account show that currently our price from Qatar is costing us around six dollars per mmbtu. The global trend is to move away from long term contracts while we have entered in to a fifteen year contract. Clearly an explanation is needed from the ministry of natural resources.
The assertion by the finance minister that we have now attained stability and can look forward to an era of growth seems like a pipedream. The minister knows that the Governments Financial Management System (federal and provincial) is totally broken both on the revenue side and expenditure side. While there is a tax gap of almost Rs1,500 billion, the FBR is incapable of collecting it with equity. The tax regime has become intensely complex with skewed policies that lack fairness and stall economic growth. Tax administration is considered to be highly corrupt and non professional particularly at the field level. Without a major overhaul of the policies, the tax rates, coverage net and tax administration dreams of a high growth economy cannot be achieved.
The spending side of the budget is equally dysfunctional, From parliamentary oversight to the auditor general office, the line ministries and attached departments the system is full of holes. With the debt to GDP ratio exceeding the limit fixed by the debt limitation and fiscal responsibility act by a large margin and continuing to grow, leakages from the budget through corruption or incompetence are reaching astounding levels. The combined spending by the federal and provincial governments in the forthcoming budgets will exceed $80 billion. According to some economists at least 20 percent of the amount would be lost to outright theft and incompetent decision making. Leakages of such large amounts cripple the effort for development and growth. Stolen public money is oozing out from ministers and bureaucrats’ homes, it is being caught at the airports, in launches and other unlikely places. The financial integrity of the system stands demolished.
The public sector development program is becoming a huge drain. Priorities are highly skewed in favour of high cost projects, project throw forward is close to twenty years and projects take an inordinate time to complete whereas focus is on razzle dazzle projects that have marginal contribution to national GDP, wealth producing projects are sidelined or never started. In Pakistan the biggest wealth producers are the water storages and water distribution systems yet the entire budget has less money for them than the money allocated for the railways.
The investment climate of the country is sinking alarmingly. The target of 17.5 percent of investment to GDP for last year could not be met. The actual of 15.5 percent was far off from the 23.5 percent achieved in 2007. The government has not been able to benefit from the reduction of terrorism in the country. The half hearted contributions to the national action plan. Inadequate implementation of police reforms and the inability to adequately rehabilitate the internally displaced persons in FATA has led to unsettled conditions in the country. The allocation in the budget for the IDPs is wholly inadequate and would prolong the settlement effort. An approach similar to the 2005 earthquake rehabilitation and reconstruction initiative should have been adopted with matching budgetary allocations to quickly return life back to normal.
Failure to capitalise on operation Zarb-e-Azb and developing a campaign that Pakistan is open for business rather than propagating the achievements of metro or orange trains would have been more productive. Similarly CPEC should have been propagated more as a global economic game-changer rather than a strategic realignment project. A major campaign for attracting investment in Gawader from the rest of the world along with China should have been launched. Large investments from Middle East and the Gulf should have been targeted. In this respect, for example, development of a major petro chemical cluster with China as the main market would have attracted investment from the major oil and gas producers. Pakistan seems to be squandering the golden opportunity of capitalising from a booming Chinese economy for trade, investment and technology.
Another disappointment is the lack of focus on human resource development. The federal government conveniently shifts the responsibility to the provinces after the passage of the 18th amendment. Yet higher education is the responsibility of the federal government and needs major improvement. A minimum of one percent of GDP is what higher education needs. The budgeted amount of Rs80 billion is one fourth of what is needed.
While the focus of this article has been on the federal government, the performance of the provincial governments is equally depressing. Cities that could be engines of growth continue to groan under a heavy handed and corrupt regulatory environment and land mafias, poor governance in provision of urban and rural services, lack of an effective local government system plagues the provinces. The health and educational indicators are abysmal and life for the average Pakistani is miserable.
This is the last budget before the end of the current IMF program. With a largely unreformed economy and plunging global governance indicators, ballooning high priced debt and an escalating buildup of contingent liabilities embedded in sovereign guarantees issued for power projects the government is surely going to be heading for negotiating another program under worsening conditions that will surely entail weakening of national security, loss of financial sovereignty and denting of national dignity.
