Prime Minister Nawaz Sharif announced Rs 3 per unit cut in the price of electricity for industries, while addressing the 39th annual export awards distribution ceremony held under the auspices of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI).
It was a matter of serious concern to the industrial sector, concern that was conveyed to the government, that domestic electricity prices rendered their costs of production higher than the regional average. Thus the announcement generated tremendous amount of goodwill and support from the industrial community.
Be that as it may, it is disheartening that such announcements seem to reflect an impromptu largesse by the country’s chief executive in the style of emperors and kings, rather than the outcome of a carefully thought out analysis that takes account of the costs of manufacturing electricity as well as the demand-supply situation.
Ishaq Dar, the Federal Finance Minister, is widely held responsible for convincing the Prime Minister to periodically announce what he regards as decisions that would have a positive fallout on the Prime Minister’s personal popularity; in some instances Dar has taken it to the absurd level.
For example, getting the Prime Minister to announce a decline in the price of petroleum and products (as well as electricity) even though the decline was made possible through a massive decline in the international price of oil, for which neither the Prime Minister nor the Finance Minister can legitimately take credit.
The price of electricity is based on the average of different fuels used in its production, including furnace oil which has witnessed a steady decline in price. The government also relies to the tune of 44 percent on taxing petroleum and its products to generate its budgeted revenue – a heavy reliance premised on the fact that collections are easy and do not involve much toil by a poorly-run Federal Board of Revenue (FBR).
However, taxes on petroleum and its products are a percentage of the price of fuel and in the event that the international price declines the government simply raises the tax rate to sustain its budgeted revenue. This practice accounts for taxes as absurdly high as 47 percent on some items; but given the fall in oil prices in recent months, the government is still able to announce a decline in price for the end consumers.
There is, however, no doubt that the announcement cutting per unit price of electricity was necessary given the poorly performing macroeconomic indicators relating to productivity. This is evident from the dismal growth in large-scale manufacturing, closure of several textile mills, a negative growth in exports despite the GSP Plus status granted by the European Union effective 1st January 2014.
A steady decline in foreign direct investment as well as the government agreement with the International Monetary Fund (IMF) to slash development expenditure by 25 percent in the current year is pushing the economy towards stagflation.
To conclude, the government needs to do a lot more to fuel productivity and this would require a revisit of its economic policies that are not only dampening growth but also eroding the quality of life.
However, economists are unconvinced that the reduction in per unit electricity tariff alone would be sufficient to spur productivity for three reasons. First, refunds to exporters by the FBR are being inordinately delayed resulting in a severe liquidity crisis – delays which may be attributed to the Finance Ministry’s claims of total revenue generated in any given quarter to the IMF.
Second, the overvalued rupee, part of a deliberate policy to understate the annual debt servicing and repayments as and when due, is having a negative impact on our exports. And finally, the PML (N) government’s rating in terms of ease of doing business, a World Bank evaluation, has declined in comparison to the PPP-led coalition government.
Source: Business Recorder