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PERHAPS the worst way to manage shortages in critical areas is to do nothing until the shortage materialises, and then seek to curb utilisation and scrap incremental supplies from the system as it is. This applies whether the shortages in question are of fiscal resources because of a stagnant tax base, of foreign exchange because of eroding competitiveness amid rising imports, or of fuel and natural gas due to depleting gas fields and increasing reliance on imported gas.
The better way to manage shortages in such areas is to anticipate them through superior measurement and projection of supply and demand, and robust reforms to increase supplies with the passage of time so as to increase the economy’s ability to meet its requirements once they materialise.
This is not an indictment of any one government in particular. Across the board, for well over a quarter of a century, Pakistan has fallen behind in its tax reform effort and continues to rely on indirect taxes collected at the import stage for the bulk of its revenues. Foreign exchange requirements of a growing economy could be projected as far back as the 1990s as the economy was liberalised. In natural gas it was also known as far back as the early 1990s (perhaps even earlier) that the country’s gas fields will enter a period of decline around 2010. Several attempts were made to accelerate exploration, with some success.
In terms of the tax effort, Pakistan stumbled at the outset in the earliest reform budgets of the early 1990s to shift its base of revenue away from taxing foreign trade towards taxing domestic consumption. The first ‘reform’ budget of 1992 carried a steep reduction in customs duties and an attempt to slip a sales tax law into existence with some sleight of hand using the finance bill. To this day, the most critical element of that transition towards taxing domestic consumption remains an unfinished agenda: documentation of the economy. Domestic consumption is not easy to tax if much of it remains undocumented.
The country continues to flounder in search of a path to documentation and broadening the tax base.
On the fuel side for power generation, the most critical element was power-sector reform that gave a greater role to market forces in arranging future generation capacity, as well as pricing of power and privatisation of distribution companies. As power-sector reforms stalled in the early 2000s we were left with the worst of both worlds: the inefficiencies of the public sector and the costs of the private sector, without the benefits of either.
As a result, our power-pricing regime remains antiquated to this day. Perhaps the biggest cost this situation has imposed is hampering the induction of renewable solar and wind power, which relies critically on flexible and adaptive markets if its pricing benefits are to be shared with consumers. We are continuing to price 21st-century power sources (solar and wind) using antiquated 20th-century pricing regimes (upfront tariffs and cost-plus pricing).
The net result is there for all to see: a ballooning circular debt in the power sector, persistent fiscal deficits in public finance, and persistent current account deficits on the external side. I have argued in the past that fiscal and current account deficits are not necessarily a bad thing, because we have enough examples of countries that have carried these deficits for protracted periods of time without hurting their growth or depleting their reserves. They only become a bad thing when they are born of mounting inefficiencies, eroding productivity and a rigid, inelastic tax base.
Had Pakistan completed the reforms required to broaden the export base, document the economy (even if incrementally) and transition from a power sector run by the government to a power sector governed by the market, it is possible to imagine that we could continue running deficits on the fiscal and current accounts without bankrupting the treasury, depleting reserves and being forced to go to the IMF every few years to undertake a painful and regressive adjustment to eradicate deficits.
What happens when these shortages have not been anticipated and met through a robust reform effort is that the rulers fall back on ad hoc measures to try and squeeze more out of an increasingly dysfunctional system. This is why we have seen repeated recourse to amnesty schemes as a shortcut to documentation and a quick fix to looming revenue shortages. It is why we have seen recourse to gimmickry such as turnover taxes, more withholding taxes, and taxes on non-filers. It is also why privatisation has come to be seen as a revenue and foreign exchange earner more than a step to restructure the relationship between the state and capital, which is what it is supposed to be.
It is also why the cost of power continues to rise whether through tariffs or miscellaneous surcharges, rackets permeate the power sector, and billing and recovery falls behind, fuelling the circular debt.
It took us a decade to finally arrange for gas imports, due largely to the acrimonious round of accusations and allegations that accompanies any attempt at reform. It has been a decade since we abandoned the effort to transition towards value-added tax, and the country continues to flounder in search of a path to documentation and broadening the tax base. And it has been over a decade and a half since a comprehensive reform vision for the power sector was shelved in the early 2000s.
Today, our government is warning of impending gas shortages this winter, which are set to grow even larger next year. It is being forced to pass on the costs of the circular debt to paying consumers. And it is scrambling to search for incremental revenue by rolling back provincial transfers. At best, these efforts can help get the government through the year. But to put these growing shortages of vital resources behind us in a credible way, a deeper vision for structural reform is necessary. Unless we see that, there is no reason to believe that anything is changing.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, September 10th, 2020
