The austerity measures aimed at saving Rs200 billion annually on current expenditures announced recently by Prime Minister Shehbaz Sharif are seen by many as a symbolic move to reduce the fiscal deficit.

Furthermore, it is unclear whether the move will reduce waste and financial leakages, economise expenditure and improve institutional efficiency. Or will it just be an across-the-board cut?

Salient features of belt-tightening are the sweeping 15 per cent reduction in current expenditure by all federal entities and the withdrawal of salaries, perks, privileges etc, of the federal cabinet and prime minister’s advisors and special assistants.

A committee headed by Finance Minister Ishaq Dar monitors the implementation of austerity measures. The principal account officers of every ministry, division and department have been asked to comply with the government’s directive fully.

To reduce circular debt, there is a move to hand over the management of Discos to the provinces where operational efficiency and service delivery can be improved

The reduction mode in current expenditure, as well as development spending, needs to be rationalised. When federal development spending is slashed and the execution of affected projects is delayed, the costs often escalate much beyond the original estimates and affect the project’s financial viability. Not only that but for one reason or another, some foreign-funded projects are also delayed and result in financial losses.

Then with the country facing foreign debt default risks, it is necessary to accord the top priority to the completion of projects based on indigenous resources such as Thar coal to reduce dependence on a highly erratic, inflation-hit international market.

It is worth noting here that the International Monetary Fund staff has objected to the government and State Bank decision to penalise exporters for delaying export proceeds, says officials. Even corrective measures for the grey forex markets are opposed.

Another area to focus on is mini dams which require smaller investments and can be completed in a shorter span of time to provide irrigation water and electricity at the farmer’s doorsteps. It would be in line with the global trend — as the latest research shows — of rising local, regional and home-grown businesses.

The share of imported fuels in the energy mix shot up to 49pc in 2021 from 29pc in 2006. That has made electricity unaffordable for domestic and industrial consumers and accumulated enormous circular debts.

To reduce circular debt, there is a move to devolve management of distribution companies (ex-Wapda Discos) to the provinces where operational efficiency and service delivery can be improved from the point of view of location and jurisdiction.

“The provinces are in a better position to reduce line losses but also to arrest the trend of electricity theft and improve recovery,” says a position paper prepared by the Ministry of Energy for the prime minister.

The share of imported fuels in the energy mix shot up to 49pc in 2021 from 29pc in 2006

Due to bad governance and centralised transmission and distribution system, the circular debt has reached Rs2.5 trillion, and officials fear another Rs500bn may be added to the debt because of theft and line losses. The power sector losses will not end by solely increasing tariffs.

The energy ministry says Punjab and Khyber Pakhtunkhwa have responded positively to its devolution move. Sindh has already requested the transfer of the Hyderabad and Sukkur power plants, while Baluchistan has expressed concern over accumulating losses of the Quetta unit.

The state-backed sole electricity buyer is unable to dispatch more than 75pc of the aggregate capacity of 2,400-mega-watt power plants located at Thar to the national grid. The work on the delayed 200-kilometre transmission line costing about Rs12bn, originally due to be completed by August 2022, is now expected to be commissioned in about two and half months.

According to one estimate, the country imports coal worth $3-4bn per year. And former Pakistan’s chief economist Pervez Tahir says a promise made by the federal government at the highest level to link Thar by rail has not gone past the PC-I (Planning Commission) level preparation.

Similarly, owing to transmission constraints, 36 wind power projects in Jhimpir and Gharo in Sindh with a combined installed capacity of 1,835 MW, according to industry representatives, will only be able to dispatch 1,300 MW to the national grid in the immediate term. Official data shows that the share of wind power in the national energy mix in December was 2.5pc versus its share of 4.5pc in the installed capacity.

The legacy of the mixed economy in Pakistan is the bleeding state-managed units struggling to survive on taxpayers’ money. The key issue is: can devolution be a substitute for privatisation? The provinces would be put to a critical test.

On the other hand, productivity in the private sector needs to improve. According to a World Bank study, foreign firms are 46pc more productive than domestically-owned firms of comparable size operating in the same sector. These domestic firms, when acquired by foreign companies, gain productivity by about 12pc, possibly by earning through technology transfers and better management practices.

Among other factors, the report attributes low productivity to the misallocation of resources by the government. The international lender’s study puts productivity improvement at the heart of attainable sustainable growth.

In a different context, revenue collected from sales tax on services in Pakistan has gone up several times since it was transferred from the federation to the provinces. And with federal finances in shambles, it is imperative to shed excess fat to make the administration lean, thin and agile.

To cut costs on bank borrowing, the finance ministry is also working on a plan to outsource government borrowing aimed at getting money from the public at lower rates. An analyst points out that the amount of currency in circulation is rising "dangerously" instead of flowing into the banking system, adding to supply-side-fueled inflation.

The Ministry of Finance has now further increased its inflation rate forecast to 28-30pc from its earlier projection of 26pc in the coming months.

Published in Dawn, The Business and Finance Weekly, March 6th, 2023