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Rising energy costs: new economic challenges

The former caretaker government in June and July considerably increased the prices of petroleum products. The petroleum products prices are revised on every month by the Ministry of Finance and petroleum prices are suggested by the Oil and Gas Regulatory Authority (OGRA) on every end of the month to decide new petroleum products prices for the next month and onwards. In September, the present government approved up to 143 per cent increase in natural gas tariff with immediate effect having a cumulative financial impact of about Rs116 billion. The decision to increase gas rates for all consumer categories was taken at a meeting of the Economic Coordination Committee (ECC) of the cabinet in a manner that partly shifted the burden from residential consumers to all other consumer categories — commercial, industry, power, fertilizer, cement and CNG sectors. The National Electric Power Regulatory Authority (NEPRA) has allowed Rs1.16 per unit increase in consumer tariff for ex-WAPDA distribution companies (Discos) on account of fuel cost adjustment based on changes in tariff benchmarks. The higher rates for electricity consumed in August would be recovered from consumers in the upcoming billing month i.e. October and would yield about Rs16 billion in additional revenue to the Discos.

Pakistan is largely dependent on oil imports. The energy statistics of Pakistan shows that around 50 percent of the need is met by the indigenous gas production and 29 percent by domestic and imported oil and 11 percent by hydro-electricity. The country’s annual energy requirements are expected to more than double to 177 million tons of oil equivalent by the year 2020. The country has an installed refining capacity of 12.82 million tons a year from its five refineries– National Refinery Limited, Pakistan Refinery Limited, Attock Refinery Limited, Pakistan-Arab Refinery Limited and Indus Refinery Limited. Pakistan-Arab Refinery Company (PARCO), a joint venture between Government of Pakistan (60%) and Abu Dhabi Petroleum Investment (40%). Pakistan’s consumption of petroleum products currently stands at about 21 million tons, of which about 85 per cent was met through imports. The country meets only 15 percent of the consumption from indigenous crude production, while 30 percent crude and 55 percent refined products are imported. With a refining capacity of 13 million tons, Pakistan meets only half of its annual requirements.

The country’s demand for petrol is likely to increase in the coming years. The demand for petrol will cross 8m tons by 2019-20 from the current 4.73m tons, according to one estimate. The country imported petroleum products worth 3.47 million tons in July-April 2015-16, with a monthly record of 414,396 tons in April 2016. In the fiscal year 2014-15, the country imported 3.12m tons of petrol. Diesel growth remains one to two per cent per annum and will reach 8m tons by 2018-19 from the current 7.41m tons. Furnace oil demand is likely to continue to stand at 9.2m tons. In view of the enhancing petrol demand, the refineries are currently upgrading for better products.

If the government raises prices of petroleum products in a move to pass on the full impact of international oil prices to domestic consumers, it is bound to spark inflation and affect industry in the country. Pakistan’s textile industry, which accounts for two-thirds of the country’s exports, is currently struggling to revive growth. The country’s share in global textile trade dropped from 2.2 percent to 1.8 percent during last five years. The energy crisis and availability of expensive energy has caused great concern in the textile value chain. Repeated breakdowns in uninterrupted supply of electricity and gas to the textile value chain units continue to incur production loss.

The inflation goes up due to increase in petroleum products prices, electricity and gas prices. The government will not be able to afford subsidizing petroleum products for longer. It has no choice but to continue taxing petroleum, as it faces rising fiscal deficit, which will have to be made up for by printing money through the State Bank, itself the single biggest cause of soaring inflation in the country. The government levies taxes at four different stages of the petroleum chain. It collects customs duties on the landed price of oil, which itself includes a sales tax levied at the import stage. Then it collects excise duties and then adds another sales tax at the domestic sales stage. Critics propose levying the tax only at one stage which would be when the oil lands at the country’s ports from abroad. The increase in oil prices also causes a rise in receipts for general sales tax (GST).

Hike in fuel prices drives up inflation in the country by increasing transportation costs.

Inflation pushes more people below poverty line with the onset of high oil prices and continues to increase food prices. The high inflation marred the investment potential and expansion of the economy since 2009. The country’s headline inflation mounted to 25 percent in October 2008 due to sharp increase in oil prices, political instability and security situation. However, inflation growth eased to 8.9 percent in October 2009, but rebounded towards higher side on the back of government decisions to increase power and gas tariffs. Local analysts believe that high utility costs and rise in the international commodity prices including oil further inflates prices affecting the local consumer prices. Some analysts identify pass-through of higher oil prices by the government along with higher electricity tariffs due to greater reliance on furnace oil-based power plant as prime reason behind higher inflation in last three years.

Some experts point to structural issues in the economy such as hoarding and artificial price increase of essential commodities by cartels and smuggling have also been responsible for high inflation in the country. The county’s strife-battered economy, combined with higher than usual prices for staples such as sugar due to alleged hoarding by producers, has drastically weakened the purchasing power of the country’s largely impoverished population of 170 million.

The abrupt increase in petroleum products prices further disturbs the industrial sector, especially manufacturers, already hard hit by high input costs including prolonged gas, power outage as well as weak rupee against dollar. The business leaders argue that higher cost of production, owing to abrupt increase in prices of petroleum products eventually leads to cut in export orders. After procuring commodities at higher rates from the wholesalers, the retailers pass on the burden of higher transportation cost to already hard-pressed consumers.

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