PM’s Populist Subsidy Package Is Likely To Make Things Worse

PM’s Populist Subsidy Package Is Likely To Make Things Worse
Economic management in Pakistan generally follows two iron laws: one, just lay the blame of everything wrong on previous governments; and two, just re-invent the wheel by doing the same thing again, but with a different name and under a different banner.

The recent subsidy package announced by PM Imran Khan aptly follows the second law (while more than three years of economic management under PTI unabashedly follows the first one).

The first thing to note is that the subsidy package is, in effect, a second mini-budget hardly a few months after the first mini-budget was approved. This is the case where government calculations and priorities have gone horribly wrong. The subsidy would reportedly cost around Rs. 240 to Rs. 250 billion. The first question is where the financing would come from? It’s a relevant question in context of our fiscal woes, whereby the government that has to contract Rs. 2.5 to 3 trillion debt yearly to keep its affairs running.

History suggests that the first casualty would be the development budget. This is not to imply that Pakistan’s brick-and-mortar centered development budgets herald a development revolution given their wastefulness. But still, the question is why the required sum can’t be acquired through lessening current expenses that have ballooned to more than Rs. 7 trillion a year. Do we need all these government departments and agencies, and new ‘authorities’ like Rehmat ul Alimin authority?

Reportedly, the second source of finance would be unspent money from IMF’s Covid-19 fund. Not the first-time aid meant for a specific purpose might be diverted for budgetary support. And it is likely to raise tensions with IMF that will certainly object to it.

The third reported avenue of financing is diversion of dividends from government owned entities, something that is surely to ruffle shareholders and further lower the already low confidence in the government. The fourth source is additional revenue from the first mini-budget, courtesy of removing exemptions and increasing sales taxes. But that, again, would reflect utter confusion in government’s ranks. Why tax in the first place when, within a few months, you have to dole out a large subsidy?

It is important to note that there are already subsidy programs going on throughout the country, including health insurance, Kamyab Jawan loans, EHSAAS and BISP subsidy, madrassa subsidies, etc. And lest we forget, there’s already a huge subsidy to the real estate sector. Now comes the oil and electricity subsidy. Besides, there’s plan to provide 10 to twenty thousand to every unemployed graduate, and further concessions for industry.

In simple terms this is nothing but political expediency. For a government that has steadfastly passed on the effects of international prices to consumers up till now, why this sudden change? A week ago, finance minister stated that we can’t spend just to make people happy. And suddenly, the PM takes another U-turn. Arguably, the rising specter of Opposition’s no-confidence move, and overall dismal governance situation has forced PM’s hand towards politics and economics of populism. Unfortunately, this doesn’t augur well for the country. What good would increasing Ehsaas money by Rs. 2,000 achieve? Temporary palliatives are no substitute for hard reform and restructuring of the economy.

Similarly, tax exemptions on IT sector, especially removal of CGT and taxes on freelancers are not going to give much relief. The larger question remains: Is taxation the most important impediment to the IT sector, or is it Pakistan’s low quality human capital? The aim to provide 10 to 20 thousand rupees to unemployed graduates is yet another questionable step. PIDE’s recent research revealed that unemployment amongst graduates is the highest, and will grow further as opportunities are low and millions of graduates will keep on entering the labor force every year. How many unemployed can the government sustain through its stipends? A more logical explanation of this move would be the aim to lure young people away from opposing the government, given that their role would be critical in the coming days.

Sadly, majority of universities in Pakistan produce low quality graduates. Then why provide stipend and why not work towards lessening regulatory burden within the country that could foster opportunities and could result in higher growth, newer ideas and entrepreneurship? Sadly, Pakistani governments always take illogical shortcuts.

Now the POL subsidies. Oil price was hovering around $100 at the time of subsidy announcement. Two days later, oil price reached $115 and is going to further increase! It means that all the ‘calculations’ by our economic czars have gone south, and government would need to give more subsidy to keep up the promise of steadying oil prices till next budget. Mind you, the rocketing prices of wheat and other staples (Russia and Ukraine are two big suppliers of wheat) will make further mockery of these calculations.

As if this horrible calculation blunder was not enough, the PM announced yet another money ‘whitening’ scheme that will hardly bring any benefit to the country. We would do well to remember that as opposition leader, atop the container, the PM used to berate the previous governments for offering such amnesties.

Let’s also clarify another fallacy being floated around by ‘experts’ sympathetic to the government. We are being told that financing the subsidy will not be an issue since the money collected through the earlier mini-budget will solve the issue. The absurdity of this claim lies in poor understanding of distributional consequences of economic management.

Let me explain. If a government extracts Rs. 100 from the consumers and later pays back half of it, should that be couched as ‘relief’?  The first mini-budget extracted an estimated Rs. 500 billion from taxpayers, of which now it intends to re-spend at least half as subsidy. Since Pakistan’s taxation system is regressive, majority of that extraction comes from the pockets of the middle-class and the poor. But the advantages of subsidy, if any, will not necessarily accrue to them (especially the poor, who neither consume large amounts of electricity or oil). The real ‘relief’ would have been to bring no mini-budget in the first place.

Mind you, Pakistan’s extractive taxation system is such that there are hundreds of avenues available to extract money out of the people. Don’t be surprised if the consumers are hit with a litany of surcharges, duties or other indirect tax measures (the PM did not promise to not increase those!).

Palliatives like subsidies rarely work to cure the underlying issues that plague Pakistan’s economy. Arguably the most pressing issue now is the intellectual poverty; the same faces in economic management have been at the helm for decades. This dearth of ideas, aside from other things, from the same set of men is what makes Pakistan’s economic fundamentals so weak. Similarly, power sector inefficiencies have ballooned to Rs. 2.5 trillion. There is no way in the world that increasing or decreasing electricity rates would ameliorate such inefficiencies.

Unless there is a clear recognition of underlying weaknesses and a visionary, capable economic management team at the helm, things are unlikely to change. The subsidy package, in short, is much ado about nothing!

The writer is an economist. He tweets at @ShahidMohmand79

The writer is an economist. He tweets at @ShahidMohmand79