Economy marred by political protests: World Bank December 10, 2014 TAHIR AMIN0 CommentsE-mailPrintPDF Pakistan may get delayed or modify at least three areas of reforms, including approval of power tariffs, the privatisation agenda and reforms requiring legislative approval, due to the current political unrest, says the World Bank. A politically weaker government may water down certain structural reforms needed for growth acceleration and poverty reduction, the World Bank report title Pakistan Country Snapshot states. The report further says the political events following the mid-August long march and sit-in have affected the economy. The political volatility raised questions about how much the business-prone, investor-friendly image that Pakistan was carefully rebuilding has been tarnished, and how quickly reforms momentum can be recovered. It remains to be determined how much the reform momentum of the past fiscal year will be affected by political unrest. More economic volatility and political resistance is predictable. In an early sign of the ongoing difficulties, and unlike the past three favourable and timely reviews of the IMF programme, the fourth review initially scheduled for Board presentation by the end of September is delayed. At least three areas of reform may get delayed or modified: approval of power tariffs, the privatisation agenda and reforms requiring legislative approval. Alternatively, the government may consider strengthening some areas of the programme, such as governance, maintains the report. In the meantime, signs emerged of perceived deterioration of the economy. Growth may have slowed down in the first quarter due to the virtual paralysis of the government machinery. The international reserve position suffered small losses, and an accelerated rupee depreciation of 4.3 percent in less than a month forced the State Bank of Pakistans intervention of about $375 million. On the expenditure side, the cost of additional security has been small - equivalent to 0.1 percent of GDP - and tax receipts grew at 25 percent despite a call for civil disobedience by the demonstrators. Investment decisions and visits by the presidents of China and Sri Lanka were postponed, the report states. The report further says Pakistan still faces significant governance challenges that could hamper policies to reduce poverty and spur economic growth. Challenges range from the rule of law, security and a legacy of corruption, to resource management and the effectiveness of the civil service. Addressing these is critical to the success of policies to improve service delivery, competitiveness and the vital energy sector, as well as fostering stability in the country. Corruption and accountability challenges significantly influence Pakistans development objectives and service delivery. The countrys high perceived risks negatively affect the investment climate, while corruption undermines the quality of and access to services. For example, electricity supplies do not cover development needs, while rural services like health and education, as well as access to credit, have been undercut. Another critical challenge is resource management, particularly revenue collection and the finances of state-owned enterprises (SOEs). Tax collection levels are relatively limited both in a comparative sense, and in relation to the financing needs of development priorities. Meanwhile, SOEs actual and potential losses, as well as related flows of subsidies, are a fiscal risk. These two challenges will require the strengthening of tax administration, and SOE corporate governance. Pakistan has made impressive progress in reducing absolute poverty and improving shared prosperity. The percentage of the population below the national poverty rate has fallen from 34.7 percent in FY02 to an estimated 12.4 percent in FY11. Although Pakistans recent gains in poverty were rapid, they remain fragile, in part because many households remain clustered near the poverty line. An estimated 23 million people - 13 percent of the population - live on an amount between $1.25 and $1.50 per day, meaning that small reductions in consumption can greatly increase poverty rates. According to the report poverty measurement remains controversial in Pakistan. An inordinate amount of energy and attention in the poverty debate has focused on the accuracy of a single number - the Poverty Head Count - instead of on the underlying factors driving poverty and the programmes that might improve the welfare of the poor. A large decline in headcount poverty has been met with considerable public skepticism, and respected economists in Pakistan are producing estimates that are at odds with the official figures. Future efforts are needed to improve poverty monitoring and policy evaluation. Poverty measurement can be institutionalised, in part through more independent and regularised poverty assessments that link measurements to other human development indicator data bases. Another needed step is establishment of a constructive partnership between official authorities, donors and academics to promote high-quality and timely measurement of poverty and shared prosperity, analyses and program evaluation. The report says Pakistans energy sector is in serious crisis, resulting from constriction in the supply of upstream gas and downstream generation of electricity. These are two high-visibility challenges draining national accounts, undercutting economic growth and exacerbating poverty in the hardest hit areas. The policy, legislative and institutional reforms necessary to address these challenges are inseparably linked across the gas and power sectors, whereas administration in Pakistan is institutionally partitioned principally between the Ministry of Petroleum and Natural Resources and the Ministry of Power and Water. Key challenges include large and growing energy shortages, high energy costs and inefficiencies that prevent the sector from financing all its costs. The sector therefore relies heavily on government support through subsidies and funding for almost its entire investment programme. There is a growing mismatch between production and demand. Power generation has stagnated at about 94-98 TWh since 2006, while installed capacity has only increased slowly due to a lack of investment. At the same time lack of maintenance has offset any increased capacity. Meanwhile, demand has increased, resulting in greater load shedding - cutting off the electric current on lines when the demand becomes greater than the supply. These disruptions hurt industrial, commercial, and human needs. Based on preliminary estimates, power shortages have reduced GDP growth by two percent per annum for the past several years. In addition, DISCOs do not collect all the bills issued: it is estimated that some 11 percent of bills, nearly $1 billion, were not collected. Although power tariffs have risen, they are still far short of supply costs. The difficult financial picture is further complicated by government policy, which maintains uniform national tariffs even though supply costs vary widely by province and DISCOs. The government makes tariffs uniform by notifying the lowest determined tariff for each class of consumer to all DISCOs. Historically it has paid the difference from energy subsidies, but has recently stated its intention to introduce an equalisation charge so the different Discos cross-subsidise one another. The government is also committed to subsidising the smaller consumers, paying the difference through energy subsidies. Yet the volume of such subsidies is unsustainable. The shortfall in DISCO revenues-which the government finances as total debt service (TDS)-has amounted to roughly $3.5 billion-$5.0 billion annually in recent years. The government plans to reduce its subsidy bill to 0.3-0.4 percent by FY16. The subsidies for FY15 fell from an expected 1.8 percent of GDP to 1.1 percent (roughly equivalent to $1.8 billion) after the tariff increases in August and October. With revenue and resource shortfalls, the DISCOs build up arrears in payments on average by about $10 million per day. This in turn delays payments to power producers, which then build up arrears to their fuel suppliers, refineries, and so on. In June/July 2013, the government cleared the entire stock of circular debt of roughly $4.8 billion, but it started piling up again because the underlying issues were not addressed; power sector payables to generators and fuel suppliers as of March 2014 are about $2.7 billion.
Posted on: Wed, 10 Dec 2014 02:10:58 +0000
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