We fail to realise that the ‘wheel’ must keep turning if it is not to rust; only then can it can pickup pace, as things get better.
Exports are the main source of the urgently needed foreign exchange to support dwindling reserves. But even in this bleak scenario, it took the government seven days to realise that the strike was tarnishing its image abroad. It is failures of this kind that must be avoided if Pakistan is to sustain its share in foreign markets.
Cutting imports was more important than promoting exports. The rising trade deficit went un-noticed since 2004 while the lure of cheap imports steadily forced the closure of domestic businesses producing import substitutes. Worse still, it also took policy-makers too long to note that the combined effect of the rupee’s fall and higher import prices (partly due spiralling freight charges) could revive local industry.
Only on August 27 did the government do what was needed to contain imports by raising tariffs to cut imports, save foreign exchange, revive closed businesses, re-create jobs for laid off skilled workers, and re-generate lost tax revenue. How far will the new measures revive domestic industry is uncertain because of the expanding infrastructure constraints, inflation, and smuggling that we have never been able to check.
Rumour, denied by PSO, is that it has stopped furnace oil supplies to Hubco due to non-payment of its dues. Hubco, in turn, hasn’t been paid by WAPDA and the circular debt could force a collapse of the system. WAPDA owes round Rs175 billion to IPPs of which about Rs70 billion are over due, making it impossible for the IPPs to sustain their cash flows through bank borrowing.
IPPs have now threatened to call the sovereign guarantees that secure the credit extended to WAPDA, and stop supply if the government doesn’t honour those guarantees. Its huge fiscal deficit may prevent the government from honouring these commitments leading to sovereign default, which may push Pakistan’s risk rating to the bottom; pulling it up from there could be tough for any regime.
But the immediate consequence would be supply stoppage by IPPs, longer load shedding, and loss of productivity. Prolonged disruption of activity, especially in exports, leads to loss of markets. Re-entering such markets requires an enormous promotional effort, price-cutting, and offering longer credit terms. With the global economy in recession, the effort could prove overly taxing for the exporters.
Yet, a remedy — five-day working week for the services sector — to divert power supply to the industrial sector is still being ‘debated’, and the 8 p.m. closure time hasn’t been enforced on the shopping centres. These laxities reflect the regime’s popularity fears more than its policy-making hick-ups, but the price thereof is rising by the day as industrial productivity falls.
Going by the pace at which foreign exchange reserves are depleting, capacity for oil imports is shrinking and could seriously impact the largely oil-based power sector.
The Saudis are working out the modalities of the deferred payment oil import facility they, have offered. The other positive sign is the US and Canadian governments’ reported agreement to supply 3.5 million tonnes of wheat on deferred payment.
The government has not disclosed the period of payment deferment under these agreements to assess the timeframe during which Pakistan’s exchange reserves won’t deplete on account of oil and wheat import. Reports about Kuwait, Qatar and UAE offering a similar facility are, as yet, just rumours and the WB has denied that it is offering $0.5 billion for budgetary support, that was earlier reported by the government.
While government share in PSD is speculated to be cut by Rs 200 billion (to reduce fiscal deficit), private sector investment to this extent is intended to be mobilised to ensure that no project is postponed. But this amounts to over-optimism in public-private partnership, given the whole variety of uncertainties that define Pakistan’s current risk profile.
The arrangement also implies protracted negotiations on project selection and share of private investment, and agreement on strategies to contain cost escalation during construction phase, sharing project oversight, repayment terms, and investors’ role in project management after completion until the investors are repaid. All are time-consuming pre-commencement steps aside from the project completion period.
The reason cited by PML-N for withdrawing from the coalition was the regime’s failure in fulfilling its promises. It won’t bolster confidence in investors about the regime’s abiding by the many agreements (cited above) in the context of public-private partnership in infrastructure projects.
Pakistan must negotiate at least half of its oil imports on deferred payment for at least 18 months, and attract foreign investment to the tune of at least $6 billion for its crucially important water and power, and oil and gas exploration and transmission projects. Pakistan must re-double efforts to achieve these targets otherwise, beginning 2009, it may face a severe economic slowdown and the social crisis embedded therein.