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Tackling energy problem top issue

Pakistan Institute of Development Economics (PIDE) published an analysis on manifestos of Pakistan’s political parties titled, “A Socio-Economic Assessment of Manifestos: Election 2013”.

This analytical review presents a broad overview of the parties’ take on socio-economic issues presented in their manifestos. The analysis shows that tackling the energy problem, which Pakistan is facing today, is among the top agenda of the political parties as they have proposed various measures to combat this problem. These measures include one-time settlement of circular debt, public-private partnership to build dams etc., diverting resources to maximise energy, reduction cost of production through better governance and management, and appointment of professionals in the energy sector. It is argued in the review that although the steps proposed by the political parties are justified, the research conducted at PIDE shows that the power crisis in Pakistan is largely a result of misgovernance and lack of institutional capacity at various levels and in order to bring down the circular debt Pakistan needs to do away with untargeted subsidies. Rather, subsidies should be confined to the poor and the price of electricity should be increased in order to meet the rising cost of electricity generation. Therefore, if analyzed in the light of these research studies, the proposed solutions must focus on weeding out management inefficiencies, rationalizing tariff, and narrowly targeted subsidies. It is important to understand that the circular debt is not a problem but is a symptom of deeper structural problems that beset the energy sector today. Thus, when Pakistan’s economy is already troubled by mounting sovereign debt and low tax-to-GDP ratio and in such a scenario retiring circular debt in excess of Rs850 billion is perhaps not a viable solution in the long run. Any effort to tackle the energy problem will have to focus on fundamental reforms of the management of the energy sector. At the moment, energy sector is managed in a too centralised and bureaucratic fashion.

The parties have also presented solutions to the Pakistan’s debilitating fiscal situation. The parties hope to increase the tax-to-GDP ratio and reduce the fiscal deficit besides promising to limit the government borrowing. Specifically, the solutions include reducing the incidence of indirect taxes, introducing agriculture income tax, granting operational independence and autonomy to FBR, rationalising of tax rates, curtailing of expenditures and revamping and privatising the Public Sector Enterprises (PSEs) to bolster tax revenues. All the major parties have also promised to do away with SROs.

The analysis shows that most of the political parties have not clearly highlighted the expenditure rationalisation and reduction agenda and due attention is not given to the Fiscal Responsibility and Debt Limitation (FRDL) 2005 Act, which is very important since it introduces measures to implement fiscal responsibility. All the proposed measures are doubtlessly needed but it is unlikely that such measures alone would increase GDP growth of the economy. Though it would create much needed fiscal space but for low fiscal deficit and high tax-to-GDP ratio to translate into sustained economic growth much more is needed. Wasteful government expenditures are due to a number of factors most important of which is sub-par governance. There have been repeated calls for reform of the civil service (bureaucracy) but little has been done so far in Pakistan. The international evidence clearly suggests that efficient and trained bureaucracy is a pre-requisite for sustainable economic growth. In addition, it is important to realise that while expenditure rationalisation is important to tackle the fiscal problem, care must be taken while devising any such plan since fiscal austerity is being questioned the world over. And such a plan must not come at the expense of public service delivery, such as law and order or maintenance, which is already running on only 1pc of GDP. The autonomy of FBR is probably the first step in revamping – which must include appointment of a technocrat to head FBR – the tax structure because unless FBR bureaucracy is reformed, tax reforms cannot take effect. The political parties are hopeful that they would be able to achieve high rates of investment, once they come to power.

The proposed measures include tapping in all those government sector investment opportunities which crowd-in private investment and liberation of small-scale industries from bureaucracy, which is among the hurdles in the feasible investment climate. Other salient steps outlined by the parties to boost investment are the ease of credit facility and provision of infrastructure to boost growth, and building of special economic zones. The research shows that investment will also start to happen when domestic commerce, which is backbone of any economy, is stimulated. Domestic commerce, as mentioned in the FEG document, is vital for creating vibrant markets in an economy. Unless domestic commerce is not promoted other activities, including innovation and entrepreneurship, will also not gather pace.

This factor is missing from the agenda of most of the parties. It is apparent from the manifestos that almost all the major parties are very serious about building new infrastructure, be it roads, dams, schools, or industrial zones. It is hard to deny the fact that investment in infrastructure is vital as it leads to employment creation. At the same time, such visible projects help to improve the scorecard of the political parties. The review concludes that the political parties have undertaken elaborate efforts to prepare their manifestos.

However, to operationalise the policies and programmes contained in the manifestos there is a need for a clear articulation of the underlying macroeconomic framework that ensures consistency of proposed economic policies and their outcomes. Pakistan is facing complex socio-economic challenges, which require meticulous policy coordination based on a coherent macroeconomic framework that recognizes the inter-linkages among various sectors of the economy – for example, the problems of energy shortages and fiscal deficit are intertwined because of the circular debt. Specification of such a framework would help determine the viability of the proposed policy actions, the feasibility of the financing requirements, and the right policy mix and coordination among policy instruments to achieve macroeconomic and development goals. Also, there is a vast amount of global and homegrown research output that can help in the identification of the underlying issues and specific proposals to address the problems. A case in point is the issue of civil service reforms, which has been, identified as a major need of the hour to achieve robust development outcomes in Pakistan. A lot of research has been produced both globally and locally on this issue that can help in designing appropriate reforms in this area. Similarly, all the parties have vowed to improve the governance structures. Governance is a complex phenomenon and a large amount of research is available in the mainstream economic literature that looks at the incentives structures and their impact on efficiency of institutions. As pointed out in this review, this research can be immensely valuable in identifying specific actions to improve the quality of governance.

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