Pakistan finds itself in a precarious economic situation with four major issues looming on the horizon, and it’s imperative that these concerns are addressed promptly to prevent further damage.
First and foremost, the energy sector is akin to a simmering volcano that threatens to erupt. Despite the visible façade of economic stability, the discontent and unrest stemming from soaring inflation and unaffordable utility bills are becoming increasingly apparent. The origins of this crisis are well-known, with capacity charges, dubious contractual obligations, and rampant corruption contributing to the problem. Exaggerated bills are now hitting citizens hard, reflecting a legacy of mismanagement, theft, incompetence, and freeloading.
The circular debt in the power sector alone amounts to approximately 2600 billion annually, with about 2000 billion being attributed to capacity charges—an exorbitant giveaway. Furthermore, around 500 billion worth of power is pilfered annually. The system grapples with incompetence, inefficiency, and corruption, leaving those who must pay for these inadequacies frustrated and disillusioned. The energy bomb has yet to fully detonate, but Pakistan is already running out of solutions. The gas sector adds another 1500 billion to this staggering bill, accounting for roughly 40 percent of the annual budget.
Shockingly, this liability has not been disclosed in the annual statements, reflecting a dangerous tendency to postpone accountability.
Amidst superficial plans such as payment extensions and appeals to the IMF for subsidies to support lifeline users (a request that the IMF has understandably resisted), three viable options may salvage the situation:
Declare a nationwide energy emergency, acknowledging the dire circumstances Pakistanis already face. Under this emergency, invoke force majeure clauses in agreements signed with Independent Power Producers (IPPs). While this may harm Pakistan’s credibility and sovereign trust, it offers a chance to renegotiate contracts that have been detrimental to the nation.
Chinese power plants under the China-Pakistan Economic Corridor (CPEC) should also take a lead in these renegotiations to prevent unchecked exploitation of Pakistan’s resources.
If power producers refuse to revise terms under an energy emergency, the government should consider nationalizing all power plants. While this is a drastic step, it may be the only recourse to alleviate the suffering of citizens. Nationalization would allow for a rationalization of the sector’s operations, removing the debilitating clauses, and eventually returning power plants to private hands.
The second ticking bomb, the burden of Public Sector Enterprises (PSEs), must also be addressed. These enterprises collectively drain around 1100 billion annually from the exchequer in operational and debt costs. Many serve as political patronage positions, with parties reluctant to relinquish them. These state-owned entities, such as the Railway, Steel Mill, and WAPDA, carry assets worth trillions but continue to be preserved under the guise of strategic assets. However, safeguarding the republic’s well-being should take precedence, and these loss-making entities should be divested.
Proceeds from the sale of these enterprises could establish a wealth fund, sustaining a rationalized power structure that benefits consumers rather than burdening them. The obstinate and recalcitrant must comply when faced with these measures, and the state must assert itself. Diplomacy should be employed to explain the necessity of such drastic steps to external partners. IPP owners must understand the gravity of the situation and either renegotiate contracts or face the prospect of an Energy Emergency and potential nationalization.
The other two imminent crises are population growth and pension obligations. Pakistan’s population continues to expand at an alarming rate, outpacing GDP growth. To address this, intensive interventions and systemic changes are needed, such as female empowerment through literacy and employment opportunities.
Pension expenses are also on the rise, nearing 800 billion annually and threatening to rival the costs of PSEs. Establishing a Pensions Fund from budget allocations is essential for long-term sustainability, similar to models in modern economies. Additionally, gratuity payments, service term reviews, and reducing the number of government employees in pensionable positions should be prioritized in policy decisions.
Failure to tackle these impending crises urgently will lead to a self-destructive economic structure, plagued by distortion, erosion, and leaks. Any other measures will merely serve as temporary bandaids in the face of these persisting challenges.
