The price of power

Published Oct 10, 2012 12:10am

THIS week the International Monetary Fund is holding its annual meetings in Tokyo.

Central to its agenda is the management of the continuing eurozone crisis and issues relating to the monitoring of existing emergency loans to countries like Greece, Poland and Turkey, as well as new demands for loans from countries like Spain who never expected to be standing before the IMF with a begging bowl.

As a country far more familiar with that role, Pakistan has already received its share of pre-meeting scolding. Even though meetings held in Islamabad recently meant to convince the IMF delegation that Pakistan aimed to meet its debt obligations, it seems that the assurances of Pakistan’s economic managers fell short.

In the briefing held immediately after the meetings, IMF country director Jeff Franks appeared unconvinced and the delegation left after giving a terse suggestion that the Pakistani government immediately consider ending the Rs400bn subsidy on electric power provided to the poorest of Pakistan’s electricity customers.

As the IMF continues its meetings with Pakistan in Dubai and later in Tokyo, they may not hear the collective groan going up from Pakistani consumers at the increasingly long hours of loadshedding and the ubiquitous blackouts that have become part and parcel of Pakistani life.

However, before power-starved Pakistan launches into a lament about the onset of even worse power conditions, it seems that the county’s political calendar has already intervened to provide respite.

As both the IMF and Pakistani consumers know, no change of any sort, least of all one affecting a subsidy supposedly providing cheap power to millions, is likely to be implemented in the months leading up to the next election. As is always the case, the government in Pakistan will borrow more to ensure that while the next leaders may yet be unchosen, their fate, one of deep indebtedness, is already a reality.

Those of course are the political realities, and while they are likely to determine outcomes, it is useful to consider the country’s electricity subsidy (and the IMF and World Bank’s recommendations to end it) as a way to examine the distance between programmes that aim to help the poor and their ability to do so.

One policy paper from the World Bank produced in July last year details, for example, why power subsidies, through which the poorest of Pakistani consumers are provided a ‘lifeline’ connection with a unit cost of Rs75, are in fact not an effective means of either power provision or poverty reduction.

One reason for this, the paper argues after analysing data from residential consumer usage, is that a ‘lifeline’ tariff that in fact costs money fails to protect the poorest consumer. Secondly, the consumption cap on that tariff is so low that it does not conform to the consumption patterns of base users.

The consequence, the paper concludes, is that the electricity subsidy does not in actuality help the poor, its minimal overall benefits going to the richest 40 per cent of Pakistani households.

At the end comes the most crucial point — the power problem in Pakistan does not stem from the cost of power but from the failure of power companies to recover costs from consumers and from an inefficient system of power delivery that penalises those who pay to appease those that steal or have enough political connections to ignore their electricity bills.

Similar insights can be found at the IMF, whose Pakistan country report of February 2012 set off similar alarm bells regarding electricity subsidy.

Helping the poorest of consumers is indeed a noble goal and all financial institutions it seems would like the government to take care of its poor. But a power subsidy that is at best a political slogan and at worst another shoddy programme that ignores the core problems is not the way to go about it.

Some helpful suggestions from the IMF circular include boosting “public finance through revenue mobilisation”, meaning increasing the number of Pakistanis paying federal taxes.

Another is “reforming the energy sector” by putting an end to subsidies that are not really subsidies at all but excuses for refusing to solve the problem of distribution and cost recovery.

Taxes, widening the tax base and even imposing the agricultural taxes that Pakistan’s landed class has happily evaded are all election issues in Pakistan, with politicians yelling on television, waving tax payment notices that they claim to have paid.

Regardless of whom one chooses to believe, the crucial issue revealed by the IMF discussions is that the fiscal coordinates that render inevitable the failure of the next government are already in place.

According to IMF statistics, Pakistan received $3.1bn from IMF in Nov 26, 2008, $847.1m on April 1, 2009, $1200.2m on Aug 7, 2009, $1.2bn on Dec 23, 2009 and $1.13bn on May 14, 2010. In 2012, Pakistan has to repay SDR726.8m with accrued interest.

If the figures boggle, here is an easier statement to digest: the money isn’t there and everyone at the IMF expects that Pakistan will ask for another loan to avert its obligations. In the next few months, elections will come and go but the power subsidies will stay and those who don’t pay taxes now will continue to evade them.

A new government will be elected, already indebted, and Pakistan, by then deep into another sweltering summer of shortages, cuts and blackouts, will remain predictably powerless.

The writer is an attorney teaching constitutional law and political philosophy.

rafia.zakaria@gmail.com


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Comments (5) (Closed)


meekal a ahmed
Oct 11, 2012 07:20pm
the subsidy is going to the poorest? That is precisely the problem. The subsidy sits on the budget and it's benefits accrue largely to the better off. It is open-ended and ill-targeted.
farkhunda
Oct 10, 2012 10:19am
If we have rich resources why we are begging from IMF.
Cyrus Howell
Oct 10, 2012 06:19am
If Europe's purchasing power remains weak, how can that aid Pakistan's balance of trade?
zahid
Oct 10, 2012 04:56am
i feel pity to know about these realities and the way we are begging infront of world. the irony is that inspite of being a blessed country with natural resources, perfect weather, young generation and brilliant brains, we are still unable to find a way ahead. this impasse should come to end now..i beg my leaders to think about this beleagured nation......please think!
zahid
Oct 10, 2012 11:04am
we are begging because of insatiable greed of our leaders..they are not only incompetent but corrupt as well.