How Supreme Court’s decision on Panama leaks will affect the economy


It’s always the economy, stupid!


The circular debt has soared at an alarmingly high level of more than Rs400 billion, an all-time high, since 2013. The government, according to its commitments with IMF for this year, wants to keep the fiscal deficit low, and does not wants to pay the IPPs within this fiscal year



Panamagate is a scandal which shook the power centers of many countries of the world. Due to leaked documents from Mossack Fonceka, a Panama based law firm specialising in offshore services, the prime minister of Ice Land had to resign and many others were embarrassed and had to seek public apology. Although late (it’s better to be late than never), but the honorable Supreme Court of Pakistan also gave a vague decision on Panama leaks, forming a JIT to probe further into the matter of money laundering and tax evasion. Interestingly, the Supreme Court verdict started with the quote from the famous novel of Mario Puzo, The Godfather, quoting “behind every big fortune, there is a crime”.

It seems the honorable Supreme Court judges were of the opinion that Mr Nawaz Sharif is guilty but they did not have sufficient evidence to prove it; hence the JIT. It reminds me of a scene from the Indian movie “jolly LLB” in which the judge says that we know from day one who is guilty and who is not but our hands are tied by the evidence which is provided to us.

It remains unclear how FIA, NAB and other federal government authorities will have an unbiased and a neutral investigation against their own prime minister, especially when they know that the current ruling party has a strong chance of coming back to power after 2018 elections and any concrete findings against them can ruin the careers of the bureaucrats currently in charge of these institutions. Ideally, Mr Sharif should step aside while the investigation is being carried out.

Whatever happens now will have a pronounced impact on the economy. The first thing which would happen is the more than anticipated increase in expenditure in the political business cycle. Political business cycle is the increase in fiscal expenditure and alteration of monetary policy near the elections to lure voters for the ruling party’s re-election. Due to the Panama case, whether Mr Nawaz Sharif is guilty or not guilty, his political clout has been damaged and now he has less political capital compared to 2013. So, this means that he would have to spend more heavily before next elections and would have to allocate more public resources to win over voters. This could mean an increased fiscal deficit for the election year and an increased fiscal deficit would also mean that we may have to again turn back to IMF or the World Bank for lending.

Secondly, Nawaz and Shahbaz Sharif, in their fiery speeches in 2013 elections, promised to eliminate the electricity shortage problem until the next elections but the present electricity crisis shows that those promises were just political rhetoric with no real planning and substance behind it. The electricity problem still persists to the same extent as it did in 2013. That is what it apparently seems to the general public from the latest electricity outages. So this means that to lure voters, the Sharifs would have to provide uninterrupted and cheap electricity supply to win back their support. This could again create the problem of alarmingly high circular debt as we just faced in 2013 right after the PPP government. What happened at that time was that the PPP government, in an effort to entice voters, supplied almost uninterrupted electricity in the last year and piled up a huge amount of circular debt which created a gigantic problem for the next government. The Sharifs can also do the same. And in the end, all the economic growth and improvements in the economy would be eaten up by this circular debt problem.

Circular debt, in short, is that the government is not charging the customers even the actual cost of producing electricity. So for each unit of electricity supplied to the consumers, the government is charging them less than the actual cost and has to pay subsidy from its own pocket or indirect taxes collected from the public. The government does not pay the distribution companies the subsidies on time, which in turn do not pay to the oil marketing companies which in turn do not pay the oil refineries and so the whole supply chain gets disturbed and power generation companies, despite having the capacity, start producing less electricity resulting in power outages.

The circular debt has soared at an alarmingly high level of more than Rs400 billion, an all-time high, since 2013. The government, according to its commitments with IMF for this year, wants to keep the fiscal deficit low, and does not wants to pay the IPPs within this fiscal year. But what unexpectedly happened was that the summer season started earlier due to climate changes resulting in increased power consumption and consequently unexpected sudden piling up of circular debt. The government was also expecting that it would be able to alter the energy mix by 2017 so the overall cost of generating each unit of electricity would decrease but it seems that the government was not successful and we are still standing at almost the same position as four years ago.

Thirdly, a vague decision by Supreme Court would also give two more messages to the local and international movers and shakers which will be vital for the future of this country’s economy. First is regarding money laundering and black money. The message would be that if you have power in this country then prima facie nobody can even touch you. You are the law of the land. This thing would further aggravate the patronage based economy killing the roots of meritocratic economy which was budding now, thanks to the booming middle class. It would also further kill the roots of any accountability or transparency in this already lawless land.

The second message would be for the multinational corporations that Pakistan is still a corrupt country with a corrupt ruling elite which means more cost of doing business despite being an attractive big market. That would translate into less attraction for foreign multi nationals and consequently less FDI (Foreign Direct Investment). The way this news would be portrayed in international media will also further hurt the already wounded brand of Pakistan and create an impasse for international players to enter into our market. The BBC already reported this news as “Pakistan PM Nawaz Sharif survives corruption ruling”.