The
new government would not be able to do any overnight miracles. However, one
sector where it can provide immediate relief is energy and power sector
One
prediction can be made with quite accuracy, i.e., economic challenges facing
the next government are quite severe. I wish I am wrong, but to my
understanding, both the people as well as government of Pakistan would continue
to face tough time over economic and energy issues.
The
GDP of Pakistan kept on following boom and bust cycle for the last many
decades. The last boon in the GDP was in 2005, it declined in 2006, improved in
2007 and since then it is nose-diving. Due to various factors (including
political instability, floods, power crisis, reduced foreign direct investment
etc.), the last five years’ average GDP growth is around 3 per cent.
This
growth is mainly consumption driven and (after a recent change in the base year
for national income accounts) services sector contributes a major share in our
GDP (50 per cent), followed by agriculture (23 per cent), and mining,
manufacturing, construction and energy, gas and water supply (21 per cent).
Services
sector can only absorb highly skilled and literate human resources. Large scale
manufacturing is badly affected due to energy crisis, hence agriculture remains
the last resort of our labour force. Thus the sector with maximum contribution
to our GDP cannot offer livelihood opportunity to our major labour force. This
is only one aspect of our economic framework, other indicators are not
promising either.
Thus
investment as per cent of the GDP declined from 22 per cent in 2007-08 to 12.5
per cent in 2011-12. During 2011-12, negative terms of trade led to negative
contribution of net exports. During last five years, national fiscal health
remained challenged by chronic issues like ineffective taxation system, debt
hit power sector, sick public sector enterprises, governance issues, natural
and manmade disasters, and security situation. Tax to GDP ratio fell from 11.1
per cent in 2007-2008 to 10 per cent in 2012. In the same period, the FBR tax
to GDP ratio fell from 10.3 per cent to 9.1 per cent. Thirty per cent of the
entire tax collection came from POL at various stages.
Chronic
misuse of statutory regulatory orders (SROs) remained unabated during the last
five years too. Sixty per cent of tariff lines have different tariff rates for
different importers through SROs. Despite last year’s budget announcement of
having a uniform general sales tax rate (GST) in the country, we continue to
have multiple rates ranging from zero sales tax to 22 per cent on certain
products.
Low
tax to GDP ratio, power sector circular debt (around 480 billion rupees),
stocks of unpaid commodity, tariff differential subsidy, unplanned bailouts to
public sector enterprises, and natural and manmade disasters led to fiscal
deficit which averaged 7.3 per cent during the last three years and may jump up
to 10 per cent in current fiscal year. Domestic borrowing remained a major
source of financing fiscal deficit, thus crowding out the private sector. Liquidity
crunch and power crisis has virtually crippled the private sector, thus
negatively affecting new job creation among many other things.
Next
fiscal year would start with the foreign exchange barely sufficient for one
month’s imports (around 5 billion dollars) and with IMF payment of US$3.8
billion for 2013-14. So maintaining balance of payment would be one of the
first challenges on economic front facing next government. Mammoth fiscal
deficit would negatively affect the next government’s availability to spend.
The next government cannot default on debt services, would not reduce defence
and security expenditures, and most likely would have to increase day-to-day
administration expenditures to keep all allies happy. Thus, it is very clear
that brunt of fiscal deficit would be faced by public sector development
programme or, in other words, the people of Pakistan.
The
new government would not be able to do any overnight miracles and most of the
economic miseries would remain unchanged irrespective of the fact who comes to
power. However, one sector where, if it puts its acts together, the new
government can provide immediate relief is energy and power sector. Economic
and energy growth figures reveal that energy growth follows high GDP growth and
vice versa. This is a vicious chicken-egg situation, where we cannot generate
enough electricity because we don’t have enough fiscal cushions and our economy
is crippling because we don’t have enough energy to meet its requirements.
On
electricity generation, our energy mix is highly skewed to fuel oil. In 2005,
27 per cent of our electricity was being generated from oil and 51 per cent
from gas. Today we are producing 44 per cent from oil and 16 per cent from gas.
Fuel oil was US$20 per barrel in 2005, today it is US$110 per barrel. Oil
prices are up 93 per cent from 2008 to date and Pakistan spent US$12 billion in
oil imports last year. This energy mix may suit the Gulf countries but
certainly not a country like Pakistan.
Among
our neighbours, India generates 1 per cent of its electricity from oil, whereas
Bangladesh generates 13 per cent electricity from oil. Obviously, due to
expensive energy mix, per unit cost of production of electricity in Pakistan is
expensive. NEPRA determined average tariffs are Rs 12.5 per KW/h, whereas
average applied consumer tariffs are Rs 9.16 per KWh. Thus on an average, we
are losing Rs3 per KWh (per unit). This has to be subsidised by the federal
government through Tariff Differential Subsidy which is a contributor to fiscal
deficit.
The
new government would have to face the problem of fiscal management and
electricity management. All mainstream political parties have promised to
resolve economic and energy crisis. But how would they do it?
The
average per unit of electricity (KWh) price in Pak rupees for consumer in India
is 7.36, for a consumer in Bangladesh is 5.47, while for a consumer in Pakistan
it is 9.16. Our consumer has to pay more than what a consumer in India and
Bangladesh pays per unit of electricity used. This is despite the fact that we
are subsidising our electricity. We cannot keep on subsidising the electricity,
but we cannot keep on increasing the consumer tariffs either. The only way out
is to reduce our cost of electricity generation and improve its efficiency of
transmission and distribution.
Despite
stagflation, demand for electricity and gas is increasing. There is no sizeable
capacity enhancement in energy exploration in the last decade. Independent
Power Producers (IPP) are running below their capacity (and many of them have
closed down) as they are not getting their receivables from the government,
whereas the government owned power generation plants (Gencos) are running on
one third of their efficiency level. On an average, the IPPs are three times
more efficient than Gencos.
An
improvement of 5-10 per cent energy efficiency will save about US$200-300
million per annum and availability of additional thermal Mega Watts of
generation too. This is something where NEPRA would have to set benchmarks for
the generation companies. A decision on performance-based allocation of fuel to
generation plants would do the trick. Likewise, most of the electricity
distribution companies are incurring huge transmission, distribution and
collection losses. Transmission losses are much beyond the NEPRA permissible
limit and according to caretaker Minister for Water and Power, these additional
(beyond the NEPRA’s benchmark) transmission losses are equivalent to the total
electricity requirement of KPK and Balochiostan.
Third
major challenge facing the electricity sector of Pakistan is recovery of bills.
Sukkur electricity distribution company, Quetta electricity distribution
company, Hyderabad electricity distribution company and Peshawar electricity
distribution company are among the maximum collection losses. In some
instances, it is up to 80 per cent.
Most
probably the next government would shift the responsibility of this crisis to
its predecessors and would do nothing to resolve the issue using the excuse of
lack of fiscal cushion. However, all the new government requires is to plug
leakage in fuel supply system, to turn generation plants efficient, and to
minimise transmission and distribution losses.
Once
the next government would take these short term measures, it would be able to
concentrate on certain medium to long term measures including taking care of
circular debt; promotion of renewable sources of electricity generation; and
breaking the monopoly of WAPDA through encouraging private sector to generate
and distribute electricity in a competitive regime (under a strong NEPRA).
We
have been politicising the issues of economy and energy for quite some time
now. Let us hope that the new parliament would use its political wisdom to
resolve these issues.
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