THE fierce electoral contest unfolding in Pakistan has as its counterpart a relatively tranquil state of affairs in the interim set-up.
This is good, and should be the approach of any interim government. The moment is an interesting one where the play of economic forces shorn of any political push and pull is visible. And the moment can, in some respects, be said to have begun a lot earlier, a few months before the arrival of the interim government.
Consider the question of the circular debt as an example where, as of August, something unusual has been happening. On nine separate occasions, Pakistan State Oil (PSO) was allowed to go into ‘technical default’ without anybody in Islamabad finding it a matter of grave urgency. Technical default basically means that payments to the supplier were delayed. And now, one more time a tender was ‘postponed’ for a shipment due to arrive by May 5 because of lack of funds to open the letter of credit.
This represents a new chapter in the story of the circular debt.
At this point, the interim government is promising just enough money to let one shipment of 70,000 tons land on May 9, to allow for enough power generation for the three days around voting day.
A load-management plan has been drawn up, and quotas of electricity handed over to the various distribution companies. According to the new load-management plan, industrial and commercial areas will bear the brunt of the shortages for the few days when polling and the counting of votes is under way.
That’s as short term and ad hoc as it gets, and of course that’s exactly how it should be under an interim government. But something interesting has happened as the government’s minimal attention wavered: PSO drifted into default, and fuel shipments have been jeopardised.
With all the mismanagement of the power sector and its fuel supplier over the past five years, it’s fair to say that in spite of it all, such a state of affairs was not allowed to happen.
The country’s drift towards a complete fuel dry-out in the power sector has occurred in the period when political ownership of the consequences has weakened, and the best hope for revival right now is the arrival of a new government that will have to own the problem. In short, politics must rescue the power sector from complete illiquidity.
Take another example. Since 2011 or thereabouts, our banks had grown accustomed to a rather convenient arrangement that was creating winners all around, a dangerous state of affairs in the financial world.
This is how it worked. The State Bank of Pakistan (SBP) lent money to the banks through what they call an open market operation (OMO), which is a tool used by central banks all over the world to manage short term liquidity issues in their financial system. Except it wasn’t so short term here. Banks would pick up this money then lend it on to the government.
In August 2012, the SBP made its most detailed comments on this practice. This is what it said: “Since the scheduled banks know that SBP is the ‘liquidity provider of last resort’ and that the fiscal authority is a major borrower, they, at times, take an aggressive position while investing in government paper. Specifically, they bid excessive amounts in the auctions of government securities, over and above their actual funding/liquidity position, and then cover this position next day through discounting from the SBP.”
Translation: banks are lending more money to the government than they have in their coffers, because they are confident that they’ll pick up whatever additional funds they require from us through the short-term OMO.
There are grounds for complaint here because this is not what an OMO is supposed to do. It’s meant to be short-term lending, usually for a week or so, to either inject or mop up liquidity from the system, depending on whether there is an excess or deficit in its supply. It is not meant to turn into a money-creating operation.
The government of Pakistan, however, indulged in this affair heartily since around 2011, with the amounts being borrowed through this mechanism rising to a high point of almost Rs600bn.
Everybody knew all along that this had to be unwound, but nobody wanted to say it aloud, not even the SBP. Until now. For the first time the SBP says that “this approach cannot be sustained” and has begun to actually unwind the practice, bringing down the amounts being lent through the short-term window to less than half in a matter of weeks.
Why did the SBP wait until the arrival of an interim government to begin unwinding this merry-go-round? I’m willing to bet that the dissipation of political pressures and the absence of a proper “fiscal authority” with ownership of its finances had something to do with it.
Of course, all this means that a fairly large mountain of problems awaits the incoming government, because the fiscal situation and the power sector are both now running on empty. Over the years, a series of informal, ad hoc mechanisms have arisen to deal with the many dysfunctions the economy has been struggling to cope with.
In the two cases given here, the mechanisms both addressed liquidity issues — whether of the power sector or the financial sector. And it’s interesting to see how both mechanisms have fared in a time when political pressures have dissipated. The power sector drifts towards total illiquidity while the State Bank finds expanded room for manoeuvre.
Periods of interim governments open an important window into the workings of Pakistan’s economy. And perhaps it’s worth our while to study such moments, past and present, in more detail to see how the play of economic necessity proceeds when the play of politics stands temporarily in abeyance.
The writer is a Karachi-based journalist covering business and economic policy.