Quagmire – Khurram Husain

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THE initiative has now been lost and they have been pushed almost entirely into reactive mode. Usually, it takes a government a few years, well past its midway mark, to reach this point but we seem to have arrived at it a little sooner than most. We now have daily news of meetings in the Prime Minister House on price rise and inflation, and much of what they are discussing by way of solutions is little more than band-aid interventions anyway.

Regaining the initiative is a little like putting the genie back in the bottle, to borrow a cliché but, then again, it is the time for clichés because in one of those meetings in PM House they actually discussed bringing back the ration card scheme. I remember that from when I was a kid. Never thought we’d see it again one day.

The opposition’s strategy is simple. Time is on their side. They say that the government will sink under the weight of its own failures. Nobody need do anything. The only thing left to think about is the mechanics of it. Back in the 1990s, governments were evicted from office through the Eighth Amendment. At the moment there is no such mechanism, so if the speculation engulfing the capital of a coming change in faces at the top is to be played out, one wonders how exactly it will be achieved.

The opposition’s strategy is simple. Time is on their side. They say that the government will sink under the weight of its own failures.

But in terms of policy direction, there is no longer any. An IMF programme is being implemented like a textbook, and whatever shortfalls are cropping up in it, such as on the revenue side, they will be made up through stopgap measures, such as rushed privatisations whose only job is to raise money to help meet the fiscal and current account deficits. Large subsidised interventions in the food markets of the country are planned. Incidentally, when the privatisation law was drafted back in 2000, 90 per cent of all proceeds were to be used for retirement of debt and the remaining 10pc only for ‘poverty alleviation’.

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Also, the law prohibits using privatisation proceeds as ‘revenues’. They have to be classified as ‘financing’, which is not the same thing, and does not count towards meeting the revenue target or augmenting the tax-to-GDP ratio. But a clever way has been found to circumvent this law, and from what we understand, they will be showing privatisation proceeds as “nontax revenues”.

Alongside these measures they have to withdraw the 7.5 cents per unit power tariff offered to exporters last year, a move that has sparked outrage among the exporter community because the power division sought to make it retroactive, meaning they would collect all surcharges and taxes from last year. Weeks after this notification was sent out, representatives of the power and finance divisions were trading blame before a parliamentary panel where they were questioned on it.

A few days later, data on the amount of receivables by government-owned power distribution companies provided some answers. The data showed that the receivables, which is the amount owed to these distribution companies that they are unable to collect, increased by 27pc or Rs220bn between June 2018 and Dec 31, 2019. In December, the IMF had warned that the growing circular debt, of which these receivables make up a significant part, presented a serious risk to the fiscal framework, and must be tackled proactively either through tariff increases or vastly improved governance of the power sector.

The improved governance never came. There was a moment when the energy minister began tweeting out his ‘successes’, at one point even sharing a picture of himself working in his office on a Sunday. We were all supposed to be impressed that he was working so hard, but sadly, the results are nowhere to be seen.

The power distribution companies lose between 20pc and 40pc of the energy supplied to them, the IMF noted in December, and this loss makes them critical contributors to the circular debt. Controlling the continuous growth of this circular debt is a critical part of stabilising the fiscal framework. If the losses are not brought down, then the accumulated costs must be passed on to paying consumers. This is what they call ‘full cost recovery’ and it is what the IMF urged in December.

Something substantially similar is happening in the gas sector. So the government is now sitting on two large hikes it has to make — one in the price of natural gas and the other in the power tariffs. Both decisions have been postponed in the face of rising food inflation, but sooner or later it will have to be made.

The month of March could well see food inflation fall sharply, given the level of attention the government is giving to the matter. But no sooner will that happen then they will have to come forward with gas and power tariff hikes, and who knows perhaps even a mini budget. Each of these will be inflationary in its own way.

This is what I mean by ‘reactive mode. It has been a year and half, and if all we are talking about is how to control prices and meet revenue targets, then you can be sure that there is nothing else coming after the stabilisation ends. For two months now, the prime minister has been repeating his promise that 2020 will be the year of growth. How this will be achieved, other than by blowing the limited reserves and fiscal buffers that have been built with a lot of toil and tears, is not clear at all. It sounded like a vacuous thing to say about the future, that somehow, from somewhere, growth will come.

Now events have superseded even that vacuous promise. Instead of growth, we have firefighting to bring the prices of staple and perishable food down. Politically, this government is unravelling at the seams. Economically, it is bogged down in a quagmire. What comes next?

The writer is a member of staff.

khurram.husain@gmail.com