The incumbent government claims it saved Pakistan from imminent bankruptcy and successfully resumed the International Monetary Fund programme. However, Pakistan’s financial health worsened after the floods and now, the debt and capital markets are sending alarming signals that depict nervousness among investors and creditors.
The stock market remains jittery and the continued weakness in the value of sovereign bonds shows high levels of credit default risk.
The country is seeking assistance from international lenders, including through rescheduling of debt and additional funds. Although this greatly reduces bankruptcy risk, it can’t put the economy on a strong foundation.
For decades, the country has remained stuck in a vicious short-lived boom and painful bust cycles. To break free, policymakers must implement economic reforms that can put the economy on a sustainable path to recovery.
First and foremost, energy sector reforms should be introduced, focusing on policies that seek to increase Pakistan’s production of energy products. The high cost of energy imports has deteriorated Pakistan’s trade balance and driven the current account deficit to perilous heights.
In the first three months of the current fiscal year, Pakistan spent a whopping $4.86 billion on importing energy products, of which 50 per cent was related to purchases of petroleum products like petrol and diesel, as per data released by the Pakistan Bureau of Statistics.
The ‘petroleum group,’ which includes crude oil, LNG, and LPG, is responsible for more dollar outflows than any other commodity.
The tax system shows blatant inequality in which the salaried class and formal firms experience predatory tax enforcement while the informal sections of the economy pay little
Note that fuel consumption has fallen in the recent past and the volume of petroleum product imports dropped by 30pc during the quarter to 2.95 million metric tonnes (MT) from more than 4.2m MT a year earlier. But thanks to high prices, the petroleum group’s import bill still went up by around 6pc.
This isn’t the first time high energy prices have damaged Pakistan’s finances and it likely won’t be the last. It is about time the government realises that it needs to cut down its dependence on imports and do everything in its power to raise domestic energy production by bringing reforms in the oil refining and the oil and gas exploration and production (E&P) industries.
If domestic oil refineries expand their plants and fully utilise their facilities, then Pakistan can become self-sufficient in petrol and diesel production. In this case, there would be no need to import fuels since the refineries will consume crude oil, which is cheaper, to produce all of the high-value petrol and diesel at home.
The significant forex savings will be the difference between the prices of crude oil and refined products multiplied by the millions of tonnes of fuel consumed.
To achieve this, the government must bring forward the oil refinery policy, which reportedly was finalised last year but hasn’t been approved yet. Currently, no policy framework would encourage refiners to invest in plant upgradation and expansion.
Besides, the fact that the ex-refinery and pump prices are controlled by the government, as opposed to market forces of demand and supply, also makes this an unattractive avenue for investors.
The government needs to show political will by addressing the concerns of the refining industry and, in return, get commitments from the industry to expand capacity. The oil refinery policy should be introduced and fuel prices should get fully deregulated. This will lure investment, jobs and make the entire downstream sector (including oil marketing) more competitive.
The E&P industry, which is dominated by state-owned enterprises, has also struggled with inefficient and unnecessary regulations. The performance of the state-owned enterprises, which have failed to even maintain oil and gas production, let alone register growth, has been disappointing.
This space not only needs better policies but also better management of existing companies and greater participation of the private sector which will bring efficiency into this bureaucratic corner of the economy.
The policymakers must aim to lift investments from the private sector into all segments of the economy, not just the energy sector. Pakistan has struggled with a low investment-to-GDP ratio of around 14-15pc, the Economic Survey of Pakistan showed, which is lower than many other countries, such as Bangladesh, where this metric stands at over 30pc.
The private-sector investment-to-GDP ratio in Pakistan was just 10pc, while the savings-to-GDP ratio in the previous fiscal year was also weak at 11pc. With the persistently low rate of investments and savings, the country could not achieve inclusive and sustainable economic growth.
Energy, as well as all other sectors of the economy, need favourable policies as well as macroeconomic stability. The growth of mobile manufacturing and telecom industries are two recent examples that exhibit the far-reaching impact of business-friendly policies.
Supportive policy measures, such as deregulation and a favourable taxation environment, combined with macroeconomic stability, can push savings and investment rates higher.
An effective taxation environment can encourage savings and investment and channel them towards productive industries, such as oil refining, value-added agriculture and information technology, which leads to job creation and spurs economic activity. That’s in contrast to measures that incentivise parking wealth in plots of land.
As things currently stand, the tax system shows blatant inequality in which the salaried class and formal firms experience predatory tax enforcement. At the same time, the informal sections of the economy, such as wholesale, retail, real estate, and services industries, pay little.
Recently, for instance, the government levied additional taxes worth Rs33bn on the salaried class and imposed a one-time super tax on companies operating in several sectors. At the same time, it failed to bring the independent traders into the tax net after the policymakers rolled back their plan to impose a fixed monthly tax of Rs3,000 to Rs10,000. As a result, the wholesalers and retailers who represent one-fifth of the nation’s economy will contribute little to the national kitty.
The inequalities in tax policies discourage savings and investment. Moreover, they prevent the government from expanding the tax net, growing revenues, and increasing spending on the Public Sector Development Programme (PSDP) — the engine of economic growth. Therefore, the inconsistencies in tax policies must be eliminated and for this purpose, the fiscal policy should set the right priorities.
This, of course, is not an exhaustive list. In addition to the above-mentioned reforms, the government will have to take other measures as well, such as ending untargeted subsidies to the export sector to put the economy in the right direction.
But the reform agenda must start from somewhere, and the energy sector reforms and remodelling of tax policies give the authorities a good starting point. For sustainable recovery, Pakistan must put its house in order, and it should be done without any delay.
The author focuses on business and economics, specialising in the energy sector. email@example.com
Published in Dawn, The Business and Finance Weekly, November 14th, 2022