It was a strange spectacle. On the day the rest of the world was busy processing the meaning and impact of the trade tariffs announced by US President Donald Trump against almost 60 countries including Pakistan, Prime Minister Shehbaz Sharif had tariffs of his own to announce to his countrymen.

In a live televised show with ample pomp and ceremony, flanked by his cabinet and before an audience of his ministers and senior bureaucrats, Prime Minister Shehbaz Sharif took to the podium to announce a reduction in power tariffs equal to Rs7.41 per unit for all households, and Rs7.59 for industry.

These are figures for average reductions across various consumer categories and different slabs. The exact impact on household bills will vary, but for someone who consumes 1,000 units per month, the impact could be somewhere around Rs7,500.

During his speech, the prime minister laboured the point that the cuts have been approved by the IMF, telling his audience how the combined efforts of the cabinet had been marshalled up in order to make these cuts possible. But a closer look revealed something different. What the government has actually done is assemble together a raft of price adjustments that have just been made under various heads, and packaged them together as some sort of a government mandated tariff relief for the country.

The math behind the cuts

A senior source with knowledge of how these cuts are going to be financed gave Dawn.com the breakdown. According to the source, Rs1.70 of the total tariff cut will be financed with funds raised from not reducing fuel prices at the pump due to recent oil price declines, and absorbing that fuel price cut into the Petroleum Development Levy (PDL) instead. Another Rs1.90 is from the quarterly tariff adjustment for the second quarter of FY25, that the power regulator (Nepra) has already approved and will be notified any day now. Another Rs0.90 cut has already been ordered by Nepra under Fuel Cost Adjustment, a routine matter. And Rs1.45 per unit will be financed from the funds saved from the tariff reduction via revisiting IPP agreements. After these reductions, the government estimates a reduced tax incidence on power bills which will contribute the remainder of the estimated cut adding up to Rs7.41 for households of Rs7.59 for industry.

The source confirmed to Dawn.com that the IMF has been informed of this cut before Eid, but added that, to his knowledge, the Fund had merely received the information and not given a response so far. “These are all routine, regulatory adjustments in power tariffs; they do not require prior IMF acceptance, and the government told them that it will be packaging all of these together for political mileage and making an announcement,” the source said. “We do not think there will be any reason for the Fund to object”.

A global shakeup

And so while in Pakistan, we were busy processing a cut in power tariffs and its possible impact on the ongoing IMF programme, the rest of the world was reeling from tariffs of an altogether different variety.

President Donald Trump had already announced a raft of tariffs on trade with America’s bilateral partners, in which products from Pakistan have been slapped with an additional 29 per cent tariff. Pakistan ran a $3.567 billion trade surplus with the US last fiscal year, second in size only to the European Union. The size of the tariff increase is large and it will undoubtedly impact Pakistan’s external trade adversely, though it can be debated how large the impact will be given all competitor countries have been slapped with similar, and in some cases, larger tariffs as well.

The important thing is how rapidly and profoundly the world is changing around us. Trump’s tariffs are similar to the Smoot Hawley Tariff that were signed into law by President Hoover in June 1930, which broke the world economy and aggravated the Great Depression. With these tariffs, the age of globalisation has ended definitively and along with it, also the near total hegemony of neoliberal thinking in economic affairs. There were a number of preparatory crises that paved the way to this pass — the Great Financial Crisis of 2008, the Euro Crisis and the default of Greece, as well as the first trade war between the United States and China during Trump’s first term — but with these tariffs, the era of the single world market ends once and for all.

How Trump’s tariff’s impact Pakistan’s exports is difficult to determine. Tariffs for countries that compete with Pakistan’s textile exports are higher still, so there will be some benefit from there. But the tariffs will also fuel inflation in America, perhaps even pushing that economy into recession, leaving their consumers worse off and hurting demand for Pakistani exports.

Short-sighted policies

But even as the world reeled from this announcement, and leaders everywhere rushed to reckon with the fallout and fashion their strategy for the new world opening before us, we in Pakistan were treated to a show that revealed a leadership mired in ceremony and day-to-day troubleshooting.

The power tariff reductions were coming anyway, since almost two-thirds of the reduction announced is to be financed through regulatory actions, most of which are routine in nature. What mattered more than the tariff reductions themselves, was the vision for change the government was bringing to the power sector, and here the prime minister had little more to offer beyond a committee and a list of names of people who would sit on that committee.

This committee, he announced, will deliberate reduction in power losses, a move towards market pricing of electricity and privatisation of the distribution companies. It seemed odd that the government’s conversation around these foundational issues was still at the deliberative stage, but tariff cuts merited such extravagant pomp and show.

The prime minister is likely to find that any expressions of jubilation from the business community are going to be short lived. Soon the usual complaints of how difficult exports have become in this new world will return with a vengeance, and with it demands for more government support.

If Pakistan’s policy elites remain stuck in concerns about how to troubleshoot day-to-day problems, how to scramble together a “relief package” for industry or the common citizenry, and how to pass the next IMF review with no thought on what comes after stabilisation, the country will hover in a state of low growth for years to come.

The only way out of this low growth equilibrium will be to arrange a foreign bailout of the sort we availed in the middle 2000s and again in the middle 2010s and for a brief period in the years following the Covid-19 pandemic.

Watching the Trump tariffs roll in while our own prime minister congratulated himself, his team and the power of prayer for being able to pass through a power tariff cut inspired zero confidence that anyone among our policy elite understands the scale of the task before them.

Header image created with Generative AI