HYDRA-HEADED ECONOMIC CHALLENGES
SHABBIR H. KAZMI
Jan 18 - 24, 2010
With the onset of global recession and war on terror being fought in Pakistan's territory country's economy plunged in to the vicious circle of problems. The IMF has been more than kind in extending help but the pressure on the GoP to withdraw subsidies has initiated the second round of inflation. The elected government under extreme internal and external pressures has not been able to address the key issues facing the economy.
Lack of ability to make some difficult decisions, bad governance and hardly any comprehension of the pressing needs has not allowed the present government to put the economy on track. The worst crisis facing the economy is extensive load shedding of electricity and gas, not because of demand exceeding supply but only due to gross mismanagement.
Power plants owned by PEPCO, KESC and IPPs are being run at lower capacity in an attempt to save fuel but the pretended whiz-kids of policy making are looking at one side of the coin. Extended outages are affecting production and productivity of industries and also increasing motor gasoline and diesel consumption. On the one hand oil import bill is inflating and eroding foreign exchange reserves of the country and on the other hand increasing energy cost.
Frequent interruptions in electricity supply not only disrupt production process but also increase cost of production.
Higher cost of production is responsible for spiraling inflation in the domestic market and also eroding competitiveness of Pakistani exporters, evident from falling exports. According to some experts, it seems that the elected government is on a honeymoon period. While the political leaders belonging to PPP and PML (N) are never tired of holding the previous government responsible for all the ills being faced today, both the parties are trying to achieve political mileage by introducing policies proving counterproductive.
PML (N) takes pride in introducing 'Sasti Roti' scheme, mostly confined to a few cities and towns of Punjab. The scheme is adding to the overdraft of the provincial government but is hardly of any consequence for the poor. Similarly, PPP has introduced Benazir Income Support Program, costing the country billion of rupees but benefit being confined to selected segment of the society. Though, austerity is need of the time, expenses incurred by federal and provincial governments are reminiscent of filthy rich aristocrats.
While hardly any effort is being made to resolve problems being faced by the trade and industry, no opportunity is being spared to impose new taxes on those already in the tax net. If the government cannot reduce the taxes under the clutches of the IMF, can't it cut the perks being enjoyed by the elected members? Has the opposition bothered to cut even the smallest percentage of the perks? In fact treasury and opposition members have joined hands in getting the perks increased.
Ironically, government holds the IMF responsible for the hike in taxes and withdrawal of subsides which is totally incorrect. Pakistan has approached the IMF for the assistance, which wants certain corrective measures to be introduced. If the Fund insists on maintaining budget deficit at a specific percentage of GDP, the target can be achieved by cutting down expenses rather than imposing new taxes.
Increase in electricity and gas tariffs is being termed one of the conditions of the IMF, which is also not correct. The Fund requires the GoP to improve cash flow of the utility companies. These companies have two options 1) increase cash flow by increasing tariff or 2) decrease expenses.
However, the GoP always endorse increase in tariffs rather than instructing the utilities to cut down wastages, improve efficiency and curb gross mismanagement.
Over the years electricity tariff has gone up manifold but transmission and distribution losses are still hovering around 40%. Bulk of these losses are nothing but theft going on for decades in connivance with the staff of utilities. Similarly, hike in POL and gas prices is aimed at collecting more tax on these products. A smart move was made at the announcement of budget through introduction of Carbon Tax, which fizzled out only due to media campaign. However, the GoP did not spared the nation and levied petroleum and gas development levy to fleece the users of transports services.
To restore the competitiveness the GoP must immediately bring down lending rates, electricity and gas tariffs and also ensure their uninterrupted supplies. Maintaining interest rate at higher levels has proved counterproductive. While the GoP failed in bringing down inflation, higher interest rate halted the entrepreneurs to make fresh investment.
As a result of eroding purchasing power more and more people are being pushed below the poverty line. Savings to GDP ratio is also going down rather people are liquidating their investments to meet spiraling inflation.
Higher interest has also produced counterproductive, evident from massive decline in consumer finance. The worst hit is the auto industry. Production of cars has reduced to nearly half of the volume achieved couple of years ago. Similarly, many of the motorcycle assembly units have closed down, rendering thousands of workers jobless.
Those who still believe that maintaining higher interest can help in containing inflation, are working on a wrong premise. Inflation in Pakistan is 'cost pushed' and keeping interest rate high only provides further impetus. If the government is really serious in bringing down prices, it should also reduce tax on food items, POL products and electricity and gas tariffs.
In fact encouraging spending is a must for creating fresh demand, which in turn will require operating industries at higher capacity utilization and/or establishing new production facilities, creating new job opportunities and in turn generating higher revenue for the GoP.
BANKS/DFIS TO INFORM DEFAULTERS BEFORE ECIB
The State Bank of Pakistan has advised commercial banks and DFIs that they should intimate their borrowers before reporting 90-day overdue payment against his/her name to Electronic-Credit Information Bureau (eCIB).
According to a Circular (BPRD Circular Letter No. 1) of SBP, banks/DFIs shall send an intimation letter to the concerned borrower before reporting 90 days overdue against his/her name to eCIB.
"Such letter shall, inter alia, inform the borrowers about the implications of reporting of overdue against his/her name to eCIB, and allow reasonable time period (at least 15 days) for reconciliation/settlement of overdue liabilities" the circular adds.