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May 15, 2019

IMF barking up the wrong tree


May 15, 2019

The recent nonsensical IMF’s demand from the government of 25pc raise in power tariff will only act to kill economy.

Pakistan’s electricity tariffs are already double the global average and triple the regional average, and yet the amount of “circular debt” (CD) has been spiraling. All this shows the presence of acute structural problems such that any further increase in the rate for increasing the revenue will only further erode the competitiveness.

In fact, with 25pc electricity rate hike, IMF is only prescribing a quick fix pill to mask the energy sector inefficiencies by unjustly forcing the existing customers, who are already under a lot of financial stress due to high inflation and low growth, to pay for these losses.

IMF must undertake proper diagnosis of the economy to identify the core of the problems, given the extremely complex economic situation of stagflation and twin deficits, to come up with a specialized and targeted prescription that cures the key roots of the fundamental structural issues, such that they are least distortionary for growth.

The key problem of Pakistan’s energy sector is the existence of persistent inefficiencies due to structural problems including (i) insufficient revenue collections; (ii) high theft; (iii) costly and poorly targeted subsidies; (iv) governance and regulatory deficiencies; (v) high transmission and distribution losses; and (vi) inadequate attention to planning as a tool for optimal decision-making, especially with regard to location, fuel choices and so forth.

Consequently, the electricity rates in Pakistan are already very high, about two fold above the global average and three times the regional average. Therefore, 25pc tariff hikes will only raise the “cost push inflation” to make Pakistan even less competitive in the global economy.

This will take a significant toll on exports and precious foreign exchange reserves. IMF must realize that the CD is primarily the outcome of high electricity theft and transmission and distribution (T&D) losses, contributing about 22% to the CD, and, therefore, IMF’s reforms should focus on curing these problems rather than increasing the power rates.

The economic problems of Pakistan’s economy are huge, complex and deep-rooted as evident by reoccurring twin deficits and a stop-go growth pattern due to the persistence of fundamental economic structural issues. All this is despite taking 21 IMF programmes, with the last one classified as completed, subjected to very right criticism for that it has contributed to the current problems, including on the external fronts.

—Dewan Anas Mushtaq

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