The still evolving’ Broader Reforms for Brighter Future of Pakistan’, being touted by the World Bank, are promising. And the tagline with which these proposed reforms are being presented: ‘Time to Decide’, cannot be more truthful.
Pakistan currently needs structural reforms in almost every area of its socio-economic arena. But energy and tax reforms should be on top of the agenda because these parent reforms can produce the right kind of offspring reforms in all other spheres of the economy.
Structural weaknesses in Pakistan’s energy sector have created a mass of Rs2.8 trillion circular debt in this sector. This amount equals 37.3 per cent of the total tax revenue collection of Rs7.5tr. Measures to contain growth in circular debts of the energy sector, like frequent hiking of electricity and gas tariffs, make the lives of 95 million financially poor people — or 39.6pc of the total population — miserable. And they also make it difficult for most businesses and industries to survive.
Only a small fraction of businesses and industries that have so far lived on subsidies (some of which have achieved economies of scale and efficiency in the process) continue to thrive. However, their combined efforts are not enough to create enough jobs for a population of 240m. Nor can they ensure even a modest economic growth that can be sustainable. In the area of taxation, the country missed its annual budget target by Rs522 billion in FY23.
Annual losses of the gas sector alone are Rs360bn, 120 times the amount of Rs3bn the government has earmarked for a scheme designed to boost services exports
With tax potential not being materialised and high levels of circular debts, successive governments continue to (1) tax people and businesses unevenly, (2) borrow from both domestic and external sources to meet fiscal imbalance, and (3) spend less on development projects.
Taxing people and businesses unevenly (in the most obvious form of keeping the tax collection pie tilted heavily towards indirect taxes) fuels inflation and widens the gaps between the haves and have-nots. That, in turn, continues to create social unrest and frustrates even the sincerest efforts directed at fighting extremism and petty and organised crimes alike.
This, coupled with other factors like unwise geopolitical policy choices, bad domestic politics, often strained civil-military leadership and rising level of poverty, weak judicial system and questionably low quality of education — all feed into terrorism, the main impediment to inclusive and sustainable economic growth.
So, addressing the structural weakness of the energy and tax sectors is a must. All the past efforts to fix the root causes of the energy sector’s ever-growing circular debts either failed or met only partial success because of two reasons.
First, electricity and gas theft and perpetual defaults of energy bills could not be stopped because those who committed these national crimes were backed by powerful politicians or by unscrupulous elements in the all-powerful establishment. Electricity and gas theft and defaults on energy bills by individuals, businesses, industries and even government organisations amount to no less than Rs2tr.
If even a small part of the colossal losses of the power and gas sectors is contained, it can help the government redirect the savings for development projects
This has become unsustainable. And that’s why we see stronger actions taken against defaulters and thieves. Unlike in the past, the ongoing crackdown against them would likely not stop. Not because the caretaker government, with the utmost backing of the powerful military, is more committed to this cause but because international financial institutions are in no mood to let this go unchecked forever.
It is a separate story, though, that these institutions themselves are partly responsible for the mess we see in the energy sector: back in the mid-1990s, the World Bank itself had partly financed and supervised the brokering of expensive, unsustainable and structurally flawed deals between the government and independent power producers (IPP).
Under those agreements, Pakistan continues to pay IPPs for even those units of power that remain unutilised. But laying the entire blame on even IPPs would be unfair. Ever-growing inefficiencies and corruption in power distribution companies (created through unbundling of the Water and Power Development Authority) can also be blamed more for our energy woes.
The caretaker government’s decision to privatise or change the management of these companies is a right step in the right direction. One should hope the next elected government also pursues this programme diligently and enthusiastically.
If even a small part of the colossal losses of the problem-ridden power and gas sectors is contained, it can help the government redirect the savings for development projects or for subsiding wiser schemes of exports or boosting remittances.
Annual losses of the gas sector alone are Rs360bn — 120 times the amount of Rs3bn that the caretaker government has earmarked for a scheme recently designed to boost our services exports. The promised result of that scheme is $1.2bn a year at the initial stage.
Even if the scheme yields just half of this targeted result — $600m — that would translate into Rs174bn (with a presumed exchange rate of $1 = Rs290). Cut the gas sector’s losses (of Rs360bn) by less than 1pc (Rs3bn) at a time and use it for generating Rs174bn. Can there be a better deal?
Similarly, reduce the tax revenue gap (of Rs5.6tr) by just 10pc (or Rs56bn) and set up 56 institutions of higher learning to ensure future economic growth that is becoming increasingly tied to quality education and upskilling. Can there be a more lucrative prospect?
Published in Dawn, The Business and Finance Weekly, October 2nd, 2023