EDITORIAL: Cabinet Committee on Privatization (CCoP) under the chairmanship of the federal finance minister Dr Hafeez Sheikh directed the Privatization Commission (PC) to accelerate the privatization/management contracts of all entities and present the implementation plan within a week. This urgency may be sourced to the ongoing negotiations with the International Monetary Fund (IMF) on the second mandatory review, a precondition for the release of the next tranche.
Reports indicate that the IMF is deeply concerned about: (i) the government’s capacity to generate the budgeted revenue of 4.9 trillion rupees in the ongoing year (which sources in the Federal Board of Revenue intimated to Business Recorder was unrealistic even before the onslaught of the second wave of the pandemic lowered growth estimates); (ii) the rising energy sector circular debt, currently at 2.3 trillion rupees compared to the 1.2 trillion rupees inherited by this government, which continues to negatively impact on the deficit especially as the recent raise in tariffs is not adequate to meet the Fund’s full cost recovery objective; and (iii) two of the three white elephants – State Owned Entities – that are a heavy annual drain on the exchequer notably Pakistan Steel Mills and Pakistan International Airlines have begun the necessary retrenchments to rationalize the workforce, which can be fully supported, however there are reservations by a section that the timing should have been deferred till after the pandemic. In addition, the government has yet to resolve issues with respect to PIA flight operations to Europe remaining suspended because of its decision to make public its own concerns with respect to genuineness of pilot licences while there has been no improvement in the performance of the third white elephant, Pakistan Railways.
These three major concerns reflect the distinct possibility of lower than budgeted revenue collections and higher than budgeted outlays with a consequent negative impact on the budget deficit that has severe inflationary dimensions. The focus of the economic team has cleverly been to convince the Prime Minister that the economy was moving in the right direction, towards stabilization, by citing: (i) a persistent reduction in the current account deficit, a no mean achievement though it was at the cost of growth that in turn led to lower than budgeted revenue collections and a higher than anticipated unemployment level; (ii) on the growth rate in exports which was impressive though in total terms it was a couple of hundred million dollars due to the low base, with growth in imports much higher and the gap met with an unprecedented rise in remittances that is unlikely to be sustained once travel and other activities pick up; and (iii) on a surplus primary deficit that allowed them to place the entire blame on previous administrations, a mantra fully endorsed by the Prime Minister, while continuing to break all previous records of incurring domestic and foreign loans to meet expenditures.
And the economic team convinced the IMF team that it would meet the revenue shortfall from non-tax revenue in 2019-20 from: (i) higher than projected State Bank of Pakistan profits which were budgeted at 406 billion rupees last year with the actual realized at 785 billion rupees – a difference of a whopping 379 billion rupees – but with 620 billion rupees projected this year it remains to be seen if more than the budgeted amount would be realized; and (ii) privatization proceeds budgeted at 150 billion rupees last year, a target that was achieved as per the budget for the current year, while a 100 billion rupees is projected in the current year under this head. In other words, the onus of convincing the Fund that any shortfall in revenue and/or a raise in outlay as well as debt would have to be met by privatization proceeds may explain the urgency enunciated by the finance minister.
There is no doubt that reliance on privatization proceeds to meet any shortfall is going to be a challenge given the ongoing worldwide pandemic. Critics may well point to the failure to meet pledges of large scale privatization by the incumbent economic team, as well as by previous administrations, due to the resistance by the workers as well as lack of buyers/investors. And with one other deterrent in the mix these days – that of the bureaucrats opting not to proceed forward in a pandemic stricken suppressed market as it may attract criticism of having sold the family silver below its potential. It is, perhaps, a case of damned if they do and damned if they don’t. They’d rather be damned for not doing it to avoid being hounded by the National Accountability Bureau (NAB); therefore, the likelihood of privatization may continue to remain remote this year too.
Published in Business Recorder, January 6, 2021