Of late, the key economic indicators and policy movements tend to give mixed sentiments, a kind of crisscross. The current account continues to build hope, exports appear to follow suit while inflation has somewhat declined for the first time in months. That gives a sense of confidence to the economic managers to show off.

At the same time, the political leadership has different considerations. Understandably, these are at the costs of economic policy direction when the two paths should have merged. The deep-rooted structural reforms become collateral damage in the process.

The prime minister has ordered putting a hold on the increase in energy prices until the end of June 2020. The resultant absence of the fuel price adjustment in electricity rates in February played a key role in slightly reducing the rate of inflation. Still, at 12.4 per cent it is substantially higher than last year. The ease in food supplies also had a significant contribution — both have limited linkages to the monetary policy.

Read: PM orders immediate decision as ECC dithers on subsidised electricity tariff for exporters

The political impulse wants a reduction in electricity rates under public pressure; the economic mandarins would oblige but would pitch a higher increase for a quarter and then offer some discounts to create an internal buffer. The prime minister’s office is tempted to reduce the natural gas tariff and is coming up with innovative ideas like a lower return on assets, lower depreciation of regulated assets and a lower cost of losses in tariff to gas companies.

There appears to be a vested interest in higher inflation as a lower rate demands a policy rate cut that affects the reserves build-up through ‘hot money,’ already showing early signs of exit

The public appeasement move would have serious long term implications for the sustainability of the energy sector and put a strain in the relationship with the International Monetary Fund (IMF) in the short term. This has created an even more dangerous gas circular debt instead of getting rid of the monstrous Rs1.93 trillion power sector circular debt which is growing.

The arrears of two gas utilities are now bordering Rs400 billion including about Rs280bn on the account of indigenous gas supplies and another Rs100bn on account of RLNG sold to various sectors including to domestic consumers at cheaper rates. Pakistan State Oil’s receivables have gone beyond Rs357bn and others like Oil and Gas Development Company Limited and Pakistan Petroleum Limited together have over Rs200bn stuck.

The situation, instead of getting resolved through the rationalisation of the gas price in respect to parity pricing of fuel, has now been further compounded by the prime minister’s desire to cut the revenue requirement of gas companies. This has had a negative impact on capital markets.

In a policy note, Arif Habib Securities warned that such moves would be materially negative for the Sui companies because a one-per cent increase in unaccounted-for gas disallowance works out at Rs1.5bn while a one-per cent reduction in return on assets results in a revenue loss of around Rs2.8bn.

The gas companies then had to put on record that only the regulator was the competent authority for the determination of tariff, including related matters, and no change could be made other than prescribed as the mandatory procedure by law including public hearings, technical studies and consultations with all the stakeholders. It is a different matter that the regulator’s determination for a gas price increase issued in the second week of December remains unimplemented despite a legal requirement for its notification within 40 days.

The economic wizards have a dislike for such setbacks and rightly so as their reputations are at risk. Almost a decade ago, the public sector white elephants used to consume about 1.2pc of the GDP (around Rs400-500bn), today they are swallowing more than double the amount — over 2pc of the GDP.

As a counter-balance, the economist managers have prevailed in holding back as windfall revenue a large part of the reduction in oil prices in the international market. The aim is to jack up petroleum levy collection to a peak of Rs300bn instead of the budget target of Rs215bn. There appears to be a vested interest in higher inflation for now; a steep fall can add to a sharp revenue loss.

Lower inflation demands a cut in the policy rate that affects the reserve build up through so-called ‘hot money’, already showing some early signs of exit. The policy rate is currently linked to assumed general inflation rather than the traditional core inflation. There is still a case for an ease to the policy rate — the private sector credit off-take is more than three times lower than the same period of last year.

In a series of twists and turns, politics demanded wheat imports to reduce the rising price of the staple amid hoarding and profiteering allegations. Since a so-called mini-budget cannot be afforded, the economists have the development budget at their disposal to tighten and create some fiscal space.

As of today, pull and push also continues over subsidised electricity rates for export sectors. This happens at a time when Pakistan’s exports have increased in the first eight months of the current year by 3.6pc when compared to last year. The improvement may appear small unless seen in the context of 8.5pc and 5.1pc export fall in India and Bangladesh, respectively.

More importantly, Pakistan’s exports have surged by almost 14pc to $2.14bn in February 2020 when compared to $1.88bn of February 2019. Here too, the prime minister has expressed displeasure over the delay in the implementation of subsidised electricity rates for the export industry while the economic managers find a Rs50-60bn cushion to foot the bill. The navigation through the political economy at this critical juncture would test the success.

Published in Dawn, The Business and Finance Weekly, March 9th, 2020