This by all means is the toughest surgery Pakistan has gone through in its history to just stay afloat in the intensive care unit. At 14 per cent, inflation is out of control even though the majority of economic decisions are in the very initial stage or yet to be taken. Net international reserves are in the negative and the fiscal deficit is at an all time high as per official accounts.
The additional cost of corrective measures in the pipeline for the people of Pakistan is estimated close to Rs4.7-5 trillion. The inflation may go beyond 16-17pc in June and July even though some of the planned steps would follow later into the next fiscal year.
A rough run down over a 13-month fiscal adjustment — the steepest ever — would involve about Rs1.46tr of increase in electricity rates, Rs170 -460 billion in gas prices, more than Rs1.5tr of oil price impact and almost Rs1.5tr of additional tax revenue — chiefly through higher inflation and some additional tax measures.
The impact of adjustments to the national uniform electricity tariff determined by the power regulator — National Electric Power Regulatory Authority — at Rs7.91 per unit for the next fiscal year is estimated at Rs893bn. The withdrawal of Rs5 per unit subsidy introduced on February 28 would work out at Rs565bn in 13 months at the rate of about Rs43bn per month.
While adding a financial burden on common people, the government would continue importing gas at an average of $25 per unit and selling to powerful industrialists at $7 per unit
The Oil & Gas Regulatory Authority has determined a 45pc increase in the average prescribed gas price at the rate of Rs308 per unit for Sui Southern and Rs267 per unit for Sui Northern Gas Company with a net additional financial impact of about Rs165bn.
About Rs450bn is a backlog of previously determined but unrealised valid revenues including those relating to the diversion of imported expensive LNG to domestic and subsidised industrial consumers. It would depend on the government how the schedule for these recoveries works out with the International Monetary Fund (IMF). In any case, however, it would have to be settled through subsidy in the budget or an additional burden on consumers.
On top of that, the zero-subsidy oil price recovery from consumers under the current international market would cost an additional Rs1.56bn or so. Any requirement for taxation on oil products in the next budget may become unviable.
On the contrary, while adding a financial burden on common people, the government would continue importing gas at an average of $25 per unit and selling to powerful industrialists at $7 per unit.
As if that was not enough, the IMF wants authorities to target next year’s revenues at about Rs7.5 trillion against an estimated Rs6tr this year. Almost Rs1.1tr of this is estimated to flow out organically with average annual inflation of around 14-15pc plus 4-5pc of economic growth, leaving no more than Rs400bn for the tax machinery to generate through additional taxes on earnings on real estate and share prices and so on.
That would not be a small shock for the people to absorb while global economic conditions remain uncertain. But these have become inevitable to at least instil minimum economic equilibrium in the short to medium term while carving out a reform path that is sustainable over the longer term. To people’s disadvantage, such cycles have been returning with a quick succession of 2-3 years rather than earlier boom-bust episodes in decades.
The bigger challenge is that political forces and their other stakeholders do not appear ready to work together to sail the country through one of the most challenging times in its history. The blame game has made it almost impossible for warring parties to sit together for a joint economic order to absorb the shock arising out of global conditions and the lack of structural reforms pending for decades.
The successful completion of the 7th review with the fund following the announcement of the budget to sanctify policy measures coupled with the rolling over of Chinese loans is expected to send an assuring message to the rating agencies and the markets to build a sense of confidence.
But on top of the additional financial burden on consumers, the government would be required to take long outstanding structural reforms across the economic sector as well as measures on supply-side management.
For example, there is no point in sticking to a 6-day a week when oil and electricity prices are record high. In fact, since this government came to power almost two months ago, it has not been able to send across a message to the nation about energy conservation or to be frugal in any aspect, least to lead by example.
This is despite the fact that proposals have been on the table for fuel and energy conservation through 4-days of working week with increased working hours along with limiting commercial activities to daytime for reducing foreign exchange spending by almost $3bn a year in oil imports alone.
Similar cost-cutting measures across all sectors and segments of the economy should have been examined at the outset for a government with over $35bn repayments due 12 months from now on.
Instead, the prime minister chose to increase working days to six, with more than 15pc additional fiscal impact. He has hinted at applying cuts to fuel allocations to ministers and ministries but this would only have a cosmetic and notional impact given the limited size of non-salary expenditure.
Belt-tightening would have to be ensured across the economy without any exemptions in the coming budget. But while such sacrifices are repeatedly demanded of the common people, it would appear inequitable and contradictory if powerful groups get away with large supplementary grants in the tens of billions of rupees in the last month of the fiscal year.
Published in Dawn, The Business and Finance Weekly, June 6th, 2022