Daily Times

These are crucial times for Pakistan. The economy remains unstable, and aid packages coming in from allied countries are too minor to help in any significant way. This means that eventually, the country will have to turn to the International Monetary Fund (IMF) for a bailout package. Naturally, this is a cause of distress for Prime Minister (PM) Imran Khan. His discomfort is clearly palpable in his never-ending string of statements saying that the country may not go to the Fund after all. PM Khan might be concerned about the prospects of losing electoral support, or perhaps he suspects that conditions of bail out will curb his party’s ability to develop and implement home grown reforms.

Should the government fail to mitigate inflationary pressure from IMF-led reforms through an appropriate social safety net, millions households surviving under or close to the poverty line will be affected. That warrants the governing party’s attention more than any political infliction. In the likely event of a three year bailout plan, the Fund will get procurement from the government in the form of several drastic monetary and fiscal policy changes to improve macroeconomic fundamentals. The continuity of the program would require the implementation of expensive reforms to increase tax revenues and reduce the subsidisation of state owned enterprises. These taxing reform avenues will not change regardless of the conditions agreed upon with the IMF. The third, so-called “mini” budget is also nothing more than a haphazard attempt to secure the confidence of the poverty-stricken electorate.

Meanwhile, the Pakistani Rupee continues to lose its value. Should we agree to implement the IMF’s measures, not only will our currency be further impacted, all existing energy subsidies may also be removed. The Fund has repeatedly noted that the Rupee is overvalued and a flexible rate regime will improve our exports and competiveness. Inversely, the depreciated Rupee will inflate the cost of imported fuel, food items and consumer goods. And we don’t have any apparent options to hedge against this risk. In the financial year 2017-18,we imported $20 billion worth of vegetables and mineral products. The import of petroleum products constituted around $15 billion that year. Brent crude oil price is $76/barrel, up from $69/barrel in January 2018 with minimum chances of reversal in the time coming ahead. It is also likely that the Saudis will add a premium for the $3 billion deferred payment of which $1 billion was given recently for the sake of financial stability.

The government should not agree to conditions which will further increase the prices of power and gas because this will only elevate the levels of hopelessness among the electorate

The Government certainly owes an explanation to the nation regarding this matter. For starters why is this arrangement being called a package and not a loan?

It is also known that our energy system in general and power system in particular are plagued by poorly designed and inadequately funded subsidy programs. Analyses suggest that this is due partly to the seasonal variation in power consumption and the exclusion of 50 million people from the grid-connected consumer base. The desired benefits of energy subsidies rarely benefit poor households.

Moreover, the existing framework of Tariff Differential Subsidy(TDS) is also flawed. The Government sets TDS every fiscal year, but its subsequent failure to disburse an accrued amount on time worsens the infamous circular debt. This subsidy is budgeted to be Rs105 billion for FY 2018-2019, which is arguably insufficient amid high oil prices and the likely devaluation of the Rupee.

It is noticeable that institutions that were structured decades back can’t be reformed overnight. Therefore, if required by the IMF the government should lay down a plan to make energy subsidies more equitable and gradually replace existing subsidy programs with better solutions.

The short term measure is to introduce different slabs for summer and winter months. Households consuming 4000 to 5000 kilowatt-hour (kwh)/ year should not be subsidised in December. In the long run, the government should continue strengthening the reliability of the national socio-economic registry NSER that will nurture the leverage of subsidy in energy and other sectors. Five million households are still in the pipeline to uproot reservations of the people. The sensitive price index may serve as a proxy to calculate the required amount of support as the impact of an IMF bailout will ultimately translate into the value of goods and services purchased by the households.

The government should not agree to conditions which will further increase the prices of power and gas because this will only elevate the levels of hopelessness among the electorate. Any such step will also multiply inflationary pressure and our exports will become less competitive. Alternately, the government should force DISCOS to sufficiently increase the ratio of bill recovery to avoid commercial losses.

Our Finance Minister should negotiate with the IMF using all his capabilities if an IMF bailout is necessary. A political analyst and commentator who is a close friend of mine says that things will be settled in the coming two years because numerous countries have agreed to giving Pakistan a minimum of $1 billion because of Imran Khan’s charisma.fc

The Writer is a student at Department of Political Science Government College University Lahore

Published in Daily Times, February 1^st 2019.