Prime Minister Nawaz Sharif while inaugurating the 60 kilometres long Hazara Expressway at Havelian, a component of his administration’s Pak-China economic corridor, announced amidst thunderous applause a significant reduction in the price of fuel products: 9.63 rupees per litre for petrol, 10.61 rupees for hi-octane and 4.34 rupees for kerosene. The Prime Minister then proceeded to take political mileage of the oil price reduction by expressing the hope that the decision would “go well” with the Pakistan Tehreek-e-Insaf (PTI) who were opposed to “anything positive”. This is extremely unfortunate, as it seeks to take credit for a price reduction that is sourced entirely to a favourable external factor: the sustained decline in the international price of oil due to a slowing down of Eurozone and Chinese economies. Ignored in the speech was the fact that the policy to pass through an international decline/increase in oil prices has been a part of Pakistan’s oil pricing policy for at least a decade.
The Prime Minister added during his speech, that he would urge the provincial chief ministers to ensure that the positive impact of fuel price decline is passed onto the consumers and by this he was referring to a well established fact namely transporters’ promptness in raising fares as and when the oil price is raised but who have shown a marked inflexibility in not reducing fares as and when oil price declines.
Apart from reduced oil prices that are impacting positively on the economy there are two other external factors, which are providing tremendous support to Pakistan’s economy at present. The first is the historically low interest rates in the Eurozone economies that are not only fuelling our remittance income, the major source of highly desirable foreign exchange earnings for the country as it does not require repayment of principal or interest, but also making our bond issue very attractive to foreign buyers including the Eurobonds and sukuk. Unlike other countries, Pakistan’s exports have emerged as the second most desirable source of foreign exchange earnings. However, our productive sector continues to grapple with not only rising input costs mainly due to high tariffs but also, with market interventions to keep the rupee stable (with the objective of showing a lower foreign borrowing payments in the budget), our exports are rendered less competitive internationally.
Secondly, the GSP Plus status given to Pakistan by the European Union effective January 2014 has stabilised textile export earnings. The government has not yet given due attention to the required passage of legislation and/or implementation of some of the 27 international United Nations conventions particularly on human rights, labour and environment. However, until and unless it does so the GSP Plus status would be withdrawn by January 2016 as per the agreement.
Unfortunately, though internal policies and the process of reforms remain visibly stalled and economists argue that had the external factors not acted in our favour the economy’s performance would have been abysmal. The energy sector continues to be held hostage to poor performance evident from the resurgence of circular debt of over 400 billion rupees due to a rise in power sector receivables, with one report claiming that the consumers would be charged 117 billion rupees more due to sector mismanagement – and high transmission and distribution losses. At the same time, the budget deficit reduction is largely based on a reduction in debt profile (shifting from high interest local debt to low interest foreign debt). By failing to take account of the eroding rupee value over time the PML-N administration is placing a heavy burden on whoever is in government once the loans/debts become due. This explains how the budgeted 974.9 billion rupees under bank borrowing was shown as 376 billion rupees in the revised estimates for last year and how in the current year 227.9 billion rupees only are envisaged.
Critics also lament the fact that the government has not made any changes to the tax structure in order to make it equitable, fair and non-anomalous and its heavy reliance on withholding tax is a hands-off policy subsequent to resistance by the rich to have their income documented. And current expenditure continues to grow at a much faster pace than development expenditure (due to rising debt profile and not as is erroneously thought mainly due to defence spending rise) with development expenditure slashed by 115 billion rupees last year according to budget documents.
There is a need for an independent re-evaluation of our economic policies and one can only hope that the Prime Minister, by continuing with performance evaluation of his cabinet members, takes appropriate measures to set the economy on the path of reform.