Resisting temptation for popular relief -Blogs

Resisting temptation for popular relief


n 2020, along with Covid-19, the world was warned about two other crises that could hit it hard: a global recession and a food crisis. Fortunately, Pakistan fared better than its neighbours in terms of Covid-19 impact. The smart, rather than total, lockdowns helped save livelihoods and by the end of 2020, it seemed that we had survived the triple crises.

However, things started changing in 2021. With a slight lag, inflation, which had started in the developed economies due to generous fiscal stimuli and reduced production of goods and services had started affecting the developing countries. Pakistan was no exception.

A quicker than expected global recovery from Covid-19 spurred demand, especially the demand for energy. The prices of a basket of oil, coal and gas doubled in five months from May to October 2021. Pakistan had to import fuel, pulses, edible oil and fertilisers at a high price. This had a two-pronged impact: rising current account deficit and higher inflation.

Come 2022, mounting tensions between Russia and Ukraine started taking their toll on the global energy prices. The value of Pakistan’s oil imports doubled (with a marginal increase in volume). The rupee slid down to 185 a dollar in March 2022 from 155 in March 2021.

It was difficult to contain cost-push inflation without compromising scarce foreign exchange reserves. Facing an upbeat opposition, the PTI government took the populist path, turning down several recommendations by the OGRA to pass on fuel prices to consumers and announcing an across the board ‘energy relief package’ consisting of a freeze on retail prices of petroleum products and a subsidy of electricity consumption. Both these measures led to a galloping current account deficit, putting further pressure on the value of the rupee.

As a part of the Pakistan Democratic Movement’s campaign against the PTI government, the Pakistan Muslim League-Nawaz (PMLN) launched a protest against high inflation called the “mehngai mukao march” on March 26. The Pakistan Peoples Party (PPP) and other PDM parties too promised relief from inflation after ousting the PTI government (through better governance). The energy relief package was seen as an appeasement measure and a sign of weakness on the part of the government. No wonder several opposition leaders pointed out that it was announced under opposition pressure.

The coalition government realises that subsidising energy across the board is not good policy. First, because it is not a very efficient use of subsidies. Second, because it hurts fiscal balance and is not sustainable. And third, because not reducing the demand for imported energy negatively affects the balance of payments.

An important point, easy to miss amidst the ongoing political polarisation, is that it is in the interest of the PTI, the PML-N and the PPP not to ‘politicise’ the economic policies. Whoever gets to lead the government after the next elections should inherit a healthy economy.
The economic and energy managers of the PML-N have therefore announced a roll back of the energy relief package, comparing its impact to that of landmines. The finance minister has also assured the International Monetary Fund during the “Spring meetings” that the new government will withdraw the package and wishes to revive the IMF programme.

Political compulsions and regard for economic realities do not always work in the same direction. Even though reviving the IMF package is crucial to the macroeconomic stability of Pakistan, Prime Minister Shahbaz Sharif will find it hard to risk loss of political capital by withdrawing in one go the popular relief on energy announced by his predecessor. After taking oath of office last month, he has decided not to withdraw the subsidies till May 16.

The high food and fuel prices are not a transitory phenomenon and the government cannot adequately deal with it using an ad hoc approach.

The World Bank’s recently released Commodity Markets Outlook report reveals that the increase in energy prices over the past two years (Covid-19 and the Ukraine war) has been the largest since the 1973 oil crisis. According to the World Bank, the average annual oil prices would remain 40 percent higher, natural gas prices would be 100 percent higher, and coal prices would be 80 percent higher in 2022 compared to 2021.

On food inflation, the outlook report notes that price increases for food commodities — of which Russia and Ukraine are large producers — and fertilisers, which rely on natural gas as feedstock, have been the largest since 2008.

The conclusion of the report that the food and energy price shocks from the Ukraine war could last for years merits special attention of our political leaders, both on the treasury and opposition benches.

Irrespective of how earnestly Prime Minister Shahbaz Sharif and former prime minister Imran Khan might wish to provide relief to the masses by shielding them from soaring energy prices, Pakistan has to deal with the twin deficits – a rupee deficit (fiscal deficit) and a dollar deficit (current account deficit). After dealing with the balance of payments crisis for the current financial year, it will have to arrange for another $35 billion. Our fragile national economy cannot afford popular relief measures.

In taking measures to increase job opportunities for the masses, the government should resist the temptation to provide popular relief. It should also ensure, through data triangulation using the BISP, NADRA and FBR databases that that the subsidies it provides are well targetted and not across the board.

An important point, easy to miss amidst the ongoing political polarisation, is that it is in the interest of the PTI, the PML-N and the PPP not to ‘politicise’ the economic policies. Whoever gets to lead the government after the next elections should inherit a healthy economy.

The writer heads   Sustainable   Development Policy   Institute. He tweets @abidsuleri