Likely to provide fuel to rising inflation

Oct 18 - 24, 2004

Due to falling water levels in the country's major reservoirs, leading to power shortage is likely to add further pressure on the GoP kitty. According to official figures, electricity demand within the country increased by 4.3% from 1999 to 2003. Due to no heavy dependence on thermal power generation and insufficient availability of gas most of the plants were forced to use furnace oil. In 2003-04, the power sector consumed an estimated 3.1 million tonns of furnace oil due to increased water availability. However, it is believed that in 2004-05 the water situation is likely to get worse. Reduction in water levels alone is likely to increase dependence on electricity produced from furnace oilfired plants by about 13.5%. This will, in turn, increase the power sector's net oil consumption by about the same magnitude. With high international oil prices, additional fuel bill will result in widening of the trade deficit. This has the potential to bring rupee-dollar parity further under pressure.

Currently, Pakistan generates total electricity of 75,682 GwH. The thermal to hydel mix stands at 68:30, in terms of installed capacity. However, the fact is that about 48% of total electricity is produced by oil and coal-fired thermal power plants. Going forward the dependence on furnace oil is expected to increase, due to growing demand of electricity also. According to initial estimates, a power shortage of 7,000 Mega Watts is expected by 2010. In such a scenario, the GoP will face pressure to increase the pace of setting up new power plants over the next 2-3 years. Although, the LOIs have been issued for a number of plants, it is very difficult to estimate the time they may take to commence commercial production.





Star Thermal Power project

123 MW

Jarwar, Sindh

Western Electric Thermal Power Project

150 MW


Balloki Thermal Power

400 MW


Fauji Korangi Power Project

150 MW


Kotli Hydro Power

97 MW

Kotli, AJK

Munda Hydropower

740 MW


InterGen Power Project

150 MW

Gurguri, NWFP


1810 MW


Source: PPIB

With very little rainfall in the monsoon season and less water available from melting of snow, the water level in dams has fallen to alarming low levels. The Indus River System Authority (IRSA) warns that the country has virtually entered a drought phase. Water levels in the Tarbela Dam and the Mangla Dam are 44% and 36% lower than capacity, respectively. Water levels are also down by 44% and 38% on a YoY basis, in the Tarbela and Mangla dam, respectively. We believe that over the next 2-3 years, Pakistan is likely to depend more on thermal power generation.

Due to limited gas reserves in the country most of the thermal units are forced to generate electricity by burning furnace oil. In 2004-05, electricity production from furnace oil fired plants is expected to go up by about 13.5%, which in turn will increase the net consumption of furnace oil from the power sector by about the same magnitude. Based on conservative estimate, furnace oil consumption by the power sector is expected to go up by at least 7.1% over the next five years.


During the current financial year, analysts expect an increase of 6% YoY in the country's import bill due to the increase in quantity of furnace oil quantity. For FY05, the country's total fuel bill is expected to amount to US$ 4.14 billion. Out of this the power sector's fuel bill is expected to be around one billion dollars. Additional pressure is likely to come from the higher international oil prices. The cumulative impact will be an increased pressure on the rupee dollar parity.

While a lot has been said and written about the adverse effect of growing oil bill, two factors need serious attention and immediate measures to minimize the adverse impact of rising oil prices. So far the government has abstained from passing on impact of rising crude oil prices to consumers. However, if the prices remain at current levels government will have no option but to raise domestic POL prices. This can push up the inflation rate to a level that very few economist can dare to talk about.

Another factor needing immediate attention is the declining collection of Oil Development Surcharge. In the recent past, this has been a major source of revenue. The decision, not to pass on the impact of higher international oil prices to POL consumers, has brought this collection to the lowest level. The government also cannot afford to stick to this policy. Many economists strongly believe that a point has reached, where the government has to make the tough decision of passing on the impact of higher oil prices to consumers.