New government economic challange

Each of the two coalition major partners – PPP and PML (N) – had their good and bad economic policies in their previous two incarnations. Today when in Asif Zardari’s words they have to ‘sink and swim together,’ they will have to learn from their past mistakes and build on their good policies.

 

But first let us have a look at how bad is the economic inheritance. Three major issues will haunt them: Energy crisis, rising prices of food items and oil and worsening balance of trade. Now what should be the immediate move of the coalition government? They don’t have a magic wand. Musharraf’s government is being blamed for mismanaging the energy issue.

 

This is true but not the whole truth. To be fair with the last government we should acknowledge much of the blame should also be shared by the PML government of Nawaz Sharif. They dismantled one of the finest energy policy put forward by Benazir Bhutto’s government. The success of that policy attracted over $3.5 billion investment in the country in a short span of less than 3 years. Then another $3 billion investment was in the pipeline when Ehtesab-ur-Rehman hounded the investors out of the country. Today almost 30% of the total electricity needs are being met by the same much-maligned private sector power producers. Then Musharraf’s government came, which was initially obsessed with accountability and continued with anti-IPP policy. By the time they realised that a high growth rate also means high energy demand it was late. In 2004 they went out to attract investment in the power sector. Those who showed interest were told that they would not get gas hence they have to set up furnace oil based projects. The biggest problem I was told was that the decision-makers were too afraid to grant the tariff which was in the range of 9 to 12 cents per unit. One senior official told me: “When people who sanction 6 to 7 cents a unit were sent to jail how we can agree to higher rates.” This fear and the usual red tapism delayed investment in the power sector till Prime Minister intervened and pushed NEPRA to take a realistic view as the country was moving to an acute electricity shortage. Some decisions were taken and a few projects are in the pipeline but not enough to meet the massive demand. The result is that we are facing almost 8 hours load shedding.

 

So the solution is to go back to the PPP government’s power policy, which was not only successful in Pakistan but was presented as a model to other developing countries. Of course the energy would not be available at our desired low rates. It is better to have electricity at a reasonable price, than not to have it. Now it is accepted internationally that the days of cheap energy and food are over.

 

Now we should take the food prices, which is the most ticklish issue. The good thing is that PPP and PML (N) did not promise the impossible that is to pull down the prices of essential commodities to some unrealistic level. Prices of wheat have gone up by almost 100% last year owing to a rising demand and bad Australian crop. They might come down with the new crop to some extent. But any sharp decline is not expected as the demand of one-third of the world population has surged substantially owing to consistently high growth rates in last few years. Similarly edible oil prices have surged dramatically because of high consumption in the world. World oil prices are also expected to remain high because of rise of oil guzzling Chinese dragon and the Indian tiger.

The most difficult question for the new government would thus be how to provide basic food items to the poor at affordable prices. Keeping eatables prices much lower than the international prices is in the first place not feasible. The urban population is the most vocal in demanding that prices of food items produced in the country should be kept low. They are capable to speak with louder voice and have better access to mass media, so they are more effective. They tend to forget by keeping the prices of these commodities low they are actually denying their rural agriculturist brethren their fair share. And also that if these items would be sold at low prices in the country, much of these commodities would be smuggled out to hungry India and starved Afghanistan.

 

The way forward for the new government would be:

to invest in agriculture to increase the domestic production, to raise the income level of the people who are living below or around the poverty line, to provide welfare allowances to the poor instead of subsidizing everybody and to import food items immediately when there is shortage in the country to keep the prices in control.

 

Worsening balance of trade has to be controlled. First thing is to use all the public support of these political parties for conservation of energy. The energy conservation should be lead by all elected parliamentarian with the same enthusiasm that they showed during their election campaign. Next develop an oil & gas exploration policy that attracts not only the investors but the people of the energy rich areas of Pakistan. Major step in this regard could be to make the local and district council partners in the exploration company so that they get at least 25% of the profits if oil and gas produced from their region. This will not only open up the

no- go areas of Balochistan but will also resolve the decades old dispute between the oil and gas producing regions and the federal government. Today they produce energy of billions of rupees but are the poorest regions of the country. Another way of cutting energy consumption is to provide a good mass transit network for big cities and inter-city travel, instead of taking pride in producing more cars and motorbikes.

 

Nawaz Sharif’s governments had stimulated domestic investors in the past. They can again lead them to invest in their country. In the last 8 years most of the investment has been in the expansion and modernisation of the units. Now investment in new projects is needed. Foreign investment in near future would come mostly from the Middle East as the western investors will remain wary of Pakistan’s security situation. Nawaz Sharif has excellent relations in the oil rich Middle East and he is in a position to lead road shows in these countries and invite the Arab investors.

 

Privatisation process has to be stepped up by the new government. In this regard PPP government’s previous policy to follow the Thatcher model should be revised particularly for big ticket projects. PPP had floated shares of PTCL at the local stock market which got the tremendous response. This policy helps in spreading the benefit to the middle classes and creates depth in the stock market.

 

To do all this the new government should take the difficult decisions in the first 100 days, when the have their shine. As the two major parties are coalition partners, they will have an advantage of taking difficult decisions without fear of tough opposition. But the word of caution here is that they should play as a team, self play of the Ministers lets the team down.  I have witnessed ministers working at cross-purpose with each other in the past government of these parties.  Rise up and deal with these issues with political courage without getting bogged down with the bureaucratic rig morale. You need to put your right leg on the reform accelerator. But beware the heavier foot of bureaucracy would be on the brake. Make sure they own your policies. Good luck! (ayazbabar@gmail.com)

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  1. » New government economic challange

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