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ENERGY SECTOR PRICE HIKE: IMPACT ON THE ECONOMY

 

ENERGY SECTOR PRICE HIKE: IMPACT ON THE ECONOMY

 

Persistent hikes in energy prices is making the Pakistani exports uncompetitive

 

By ALI FARHAN CHAUDHRY
Aug 26 - Sep 01, 2002
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Energy is the main source of development and without proper management; Pakistan's growth is becoming stagnant. Energy prices are highly correlated to the economy growth rate and higher rate always severely leads to stagnation of the industry, raising the cost of production, subsequently leads to increase in the prices of finished goods. As a result in the local market, consumers have to bear it and in the international market price competitiveness dampens exports. Commerce Minister Abdul Razak Dawood has said that electricity and gas rates in Pakistan are high, which pose a challenge to make the industry internationally competitive. "I want to make the local industry internationally competitive, but utilities' cost is high and a challenge for us," he added.

The energy sector consists of petroleum products, gas, electricity, and coal. During decade of 1990s, average consumption of the petroleum products showed upward trend. On average, it increased by 6 per cent per annum. The consumption of gas increased by 2.7 per cent per annum. Similarly, the consumption of electricity increased by 4.8 per cent. However the consumption of coal, which showed wide fluctuation recorded an annual growth of 0.9 per cent only.

Governments used it as the most handy and direct tool to generate revenues by increasing the prices of the oil, electricity and now even the natural gas. Actually due to decades long borrowings from these institutions, Pakistan in the situation borrows more to pay cost of these loans. So, whenever Pakistan looks around debt facility from these institutions they always demand surety and security for payback and also always compel rise in energy sector prices.

Power prices' rise is affecting agriculture, which is the backbone of our economy and feeding around 70 per cent of the population. The electricity and diesel rate are continuously rising and has touched alarming levels and now needs to be controlled. These persistent hikes are leading towards destruction.

On average, the household sector has been the largest consumer of electricity, accounting for 40.3 per cent of total electricity consumption followed by industry 31.5 per cent, agriculture 14.8 per cent, commercial 5.4 per cent and other government sector 7.6 per cent. The main target market for the electricity is the rural area where almost 70 per cent population resides. The number of villages electrified has increased to 70,819 by February 2002.

Overnight, Government hiked electricity rates for WAPDA consumers by 12 per cent or 27 paisa per unit. Initially President Musharraf perched the increase. The most recent hike in the electricity prices seems well planned as initially NEPRA demanded a rise more than requirement and later on revised down the rise yet leaving burden on the consumer.

Meanwhile, it seems that government is well aware of electricity needs in different regions and to cover the shortage of electricity in Azad Jammu & Kashmir the government is encouraging the foreign investment and promoting hydel generation of electricity.

Another ingredient of the energy sector is oil and petroleum and hikes in its prices is also stagnating the country's growth. Pakistan's economy is highly vulnerable to sudden surge in petroleum prices as Pakistan meets its requirements through imports. The petroleum imports comprises of almost 15 per cent of imports, which is very significant. This is a major drain of country's foreign exchange reserves and has been causing serious balance of payment difficulties. New price mechanism has been introduced and sub-committee of the Oil Companies Advisory Committee meets biweekly and revises oil and petroleum prices. And now adjustments in oil prices are directly related to fluctuations on oil prices in international market. But still local oil prices are inflated and are one of the biggest sources of revenue for government but at the same time also source of inflation.

The Federal government surprisingly increased the petroleum prices by 13 per cent on January 01, 2002, in addition to development charges, to generate more revenues. And, most recently, the prices of oil products rose by as much as 3 per cent, barring high-speed diesel which recorded a drop of 1.4 per cent on 1st of August.

The impact on developing countries would likely be at least as large as for many of the industrial countries. When the oil export countries are making money at the same time net oil importing countries like Pakistan are facing a significant adverse impact on the economy. So, here would like to highlight that persistent hikes in oil prices either by internal or external factors is alarming for the developing country.

Pakistan's energy sector still has room to improve and International Financial Institutions are lending for restructuring the sector. In this regard Asian Development Bank lent Pakistan US$300 million in year 2000 and agreed to lend US$200-250 million in 2003. ADB's total lending is worth US$2.9 billion in last 30 years out of which US$2.3 for power sub-sector and US$0.6 to the natural gas and petroleum sub-sector.

Meanwhile, the sectoral consumption of gas shows the consumption of gas during the first nine months of FY 2001-02 is rising. The Power sector comes with higher consumption of 29 per cent, followed by households 7.2 per cent, fertilizer 6.5 per cent, and industry 12 per cent, mainly due to conversion of power plants into gas and most of the gas supplies are fulfilled by main gas fields; namely, Zamzama and Miano.

The price hike mechanism, recently, grasped gas sector where the Oil and Gas Regulatory Authority (OGRA) increased prices of Sui Southern Pipe Line by 6.5 per cent of Rs 7.13 per million cubic.

Additionally government is encouraging other source such as; Liquefied Petroleum Gas (LPG) and Compressed Natural Gas (CNG). Currently 22 companies are marketing the indigenous and imported LPG. At the same time government is promoting usage of CNG in automobiles that ultimately will reduce dependence on petroleum.

Now coming towards the most sophisticated, delicate and complex source of energy means nuclear power. It is the most expensive and complicated source to generate the energy but luckily Pakistan has both resources and capability in this field. Pakistan is generating 137 MW nuclear power in Karachi Nuclear Power Plant since 1971. Another Nuclear Plant, Chashma Nuclear Power Plant generated 1415 million KWH during the period of July-March 2001-02. Now Pakistan should chalk out plan to generate nuclear power. This is one area where research and development will show breakthrough.

After having a look at the energy sector we can say Pakistan governments are playing the role of intermediaries between International Financial Institutions and the poor people of Pakistan where the poverty is below the standards, established by these institutions. So persistent hikes in energy prices is making the Pakistani exports uncompetitive that is avoiding poverty alleviation and unemployment in the country. The blind implementation of bureaucratic policies of International Financial Institutions in the energy sector to make these sectors profitable is alleviating poverty and in the real terms dragging down the living standards. At the end better economic management and well managed natural resources can help us to overcome energy prices hike problem.