Economic management

Vagaries of Consciousness

• A shaky start

No significant economic policy statement has so far been made by any of the high officials. Most analysts are of the view that the government has spent only 11 days in office and it is unjust to demand elaborate plans within such a short period of time. Accordingly, it is too early to judge the performance of the government.

Still, there are worries slowly growing in people’s minds. A great deal of general goodwill has been frittered away on non-issues such as cost of PM’s helicopter ride, removal of Pak Pattan DPO, acrimonious exchange by a minister with bureaucrats, and general unpleasantness associated with matters of VIP protocols. On the other hand, the markets are down and the euphoria witnessed in the first few days is fading. The stock market is closing the month of August on a negative note after showing an exceptional performance in the backdrop of the election.

Petroleum price adjustment that was due on 1 August 2018 was deferred by the interim government. The new government has effectively scraped such a consideration as now the new prices for September are due. Incidentally, the proposal for September is for downward adjustment. We suggest that the government should leave the prices unchanged and mop us these reductions for making up tax losses incurred due to reduction of prices in mid-July to ward-off Supreme Court action on such prices and non-adjustment on 1 August 2018.

It is still not clear how the government plans to stabilise the economy, which is the main problem facing the country. On several occasions, the finance minister has stated that the government is presently evaluating various options and in case an IMF program is solicited, it wouldn’t be the first time to do so. Furthermore, the government would go to IMF only after consulting the parliament. Clearly, this is not a sufficient disclosure of policy and hence one has to wait for some more time in this regard.

Some clues about the style of policy making may be ascertained by the proceedings of the first ECC meeting chaired by the finance minister. Based on press reports, it seems the meeting essentially took note of a number of issues facing the economy without taking many decisions. However, in a surprising move, the ECC decided to declare that the decision of the previous government to allow export of excess fertiliser produced from subsidised gas was against the interest of the farmer community. A newspaper report has suggested that the ECC also decided to seek a return of the windfall of Rs10 billion made by the fertiliser manufacturers to government treasury. A decision to import fertiliser, the main recommendation of the summary, was postponed until a committee made for the purpose submits its report.

Whether one goes to the Fund or finds its own solution, the equation to be solved is the same: Imbalances, fiscal as well as external, have to be removed

From the facts available in the press reports, it seems that the observation regarding the previous decision of export of fertiliser and accrual of Rs10 billion windfall was not based on the summary presented to ECC by the concerned ministry. Under the circumstances, the reported observations of excess production and demand for return of windfall are a bit premature and would not be helpful in raising the confidence of the business. More importantly, it is also advisable that decisions to import should be made on a timely basis as shortage of critical input could lead to poor agriculture production which would have negative spiraling effect on growth.

There were two other important issues that were considered by the ECC. First, a review of the circular debt (CD) in the power sector which was reportedly recorded at Rs596 billion, whereas Rs582 billion have been paid on the basis of loans from the banks parked in a special purpose vehicle, Power Holding Company Limited (PHPL), but not yet allocated to Discos, on whose behalf these loans have been contracted. The total CD is around Rs1.2 trillion. ECC was also informed that CD was accumulating at the rate of Rs30 billion per month, which is an alarming speed. The ECC has constituted several sub-committees, each for an identified reason contributing to CD, and directed them to submit their recommendations in the light of which the Cabinet would be briefed and requested for approval of proposals. The public would be duly informed. In our view, the subject of CD is fairly old and has been extensively analysed in the past. Making of additional committees for this purpose would not bring any more clarity on the subject. The resolution of CD is urgently required and government would help itself by formulating a strategy for its settlement and end to its future accumulation without further loss of time.

The second item was related to adjustment in gas prices. In June, OGRA had issued final price determination of gas price based on the revenue requirements of the two gas companies, namely Sui Northern and Sui Southern. The average price increase is 46 percent but in the domestic category, the required increase is 300 percent. This exercise is a fairly simple affair. The bulk of the price is based on the cost the two companies have to pay to gas producers who have signed gas sales agreements (GSAs) with the President of Pakistan. GSAs bind them to sale the gas to the President at a certain pre-determined price, which is linked to some international oil price equivalent to the thermal value. With rising oil prices, cost of gas is also rising. But the previous government refused to make sufficient adjustments in gas prices leading to accumulation of arrears of Rs.300 billion. This amount is supposed to be recovered as arrears, over and above the price increase noted earlier. Furthermore, if the price determination is not accepted it would lead to a loss of Rs127 billion in the form of cash shortfall in the two companies. The companies would make up this shortfall by refusing to make payments to gas producers, government taxes and other dues. But this circular process has to terminate somewhere. Under law, the government was supposed to make a decision before 31 July after which OGRA had to announce the prices. It’s more than a month that this decision has been delayed beyond the statutory limit. By not acting quickly on this subject, the government would further accentuate the problem and risk a major disruption in economic activities.

It is not surprising that the government is shying away from taking difficult decisions. The delay in Fund program may be seen in this context. If the government is averse to such decisions, then the books would not be reconciled and accumulating imbalances would explode at some point. The desire to help the poor and the voters who have sent you to the assembly has to be matched by your ability to fund the intended benefits. With empty pockets and fast deteriorating ability to seek loans, space has to be created by taking tough decisions.

Whether one goes to the Fund or finds its own solution, the equation to be solved is the same: Imbalances, fiscal as well as external, have to be removed. Both imbalances are a product of spending more than the available resources. Accordingly, in both these areas demand has to be brought in line with the supply of resources. More taxes and reduced expenditures are the basic needs to balance the fiscal deficit, which in turn reduces imports that have given rise to external deficit.

The longer we take to address these imbalances, the harder it would be for people to adjust as in the intervening period the imbalances would keep worsening and more painful decisions would be required. There is simply not much time to ponder, only to act, and each day counts.