RISE IN POWER TARIFF REQUIEM FOR MANUFACTURING UNITS

GDP & INTEREST RATE

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Nov 23 - 29, 2009

When compared to comparable months of preceding fiscal year, July-August 2009-10 remained positive for growth of selected items under large-scale manufacturing depicting 0.17 percent rise. It was an average growth as total petroleum production in two months travelled on a downward track 13.31 percent and only 1.43 percent up in production of 35 items reported by ministry of industries and 0.55 percent production growth of 54 items by bureau of statistics brought about overall growth in LSM in July-August.

However, according to industrial experts two months or even a quarter results cannot sufficiently transpire original progress of longitudinal economic activities. Therefore, they believe an entire year at least should be kept under analysis to understand growth pattern. Until July this year, the LSM registered a negative growth. Last fiscal year (2008-09) was not good for LSM contribution of which to gross domestic product (GDP) dropped to Rs667 billion from Rs723 billion in FY08. Ignoring this negative growth can not even guarantee if improvement in large-scale manufacturing sector would be sprinkled to other parts of the real sector because of the energy mismanagement and worsening law and order situations in Punjab and frontier provinces of the country.

For many, any increase in electricity tariffs will be a proverbial requiem for various power hungry small industrial units across the country. Electricity constitutes a major component in cost of production; for some it is 10 percent and 20 for others and increase in electricity tariffs means rise in production cost or expulsion of Pakistani exporters from impatiently price competitive international market, says Razzak Hashim Paracha, chairman Korangi association of trade & industry (Kati). 'The production will slow down in consequence to tariff rise.' The government plans to increase 18 percent electricity tariffs in two phases by July next. The possibility is of higher electricity tariffs under World Bank- and Asian Development Bank-sponsored power sector reforms. If KESC is allowed another rise in tariff from backdate, it will unleash two unbeatable challenges, first exporters have to be in line with the purchase orders booked in advance two or three months back since re-quotation of prices is impossible, which implies loss, and second production needs to be contracted to balance high cost of energy. Instead of increasing tariffs what [energy companies] can do is to bring non payer in to billing, he believes. Additional revenue can do away with frequent tariff rises. Since textile is a main industry, gas and electricity crises hit it severely. Textile production declined 1.3 percent in July-August. Textile exports also slid during July-October (2009-10) to $3.32 billion from $3.65 billion in the corresponding period last year. Overall exports were recorded at $6.25 billion as opposed to $7.07 billion in July-October (2008-09).

Howsoever government used to repeat the claim that it will find homegrown remedies to economic woes of the country, it has yet to prove its mettle to materialize this claim. In reality, what the economy is undergoing is a long range of foreign prescriptions frequently in contradiction to innate characteristics of the subject economy. Thanks to heavy doses of multilateral lending, macro economic fundamentals of Pakistan's economy came to recover. Reviving payment abilities quashed the risk of default on foreign payments. IMF's financial support helped raising the foreign reserves from a dangerous level of six billion dollars in specificity. Nonetheless, the structural adjustment programme conditioned with it though could be good for the economic health made the state machinery to wear foreign glass to see domestic weaknesses. Some find few conditions of IMF structural adjustment programme best fitted a solution to Pakistan's economic malady. Like removal of subsidy, they believe, is good as according to them it slues out of direction and majority of undeserving get away with it. Be that as it may, targeted subsidy is very much required to bring many deserving out of the spiral of economic upheavals. It is rather common in various welfare states where state funds are utilized to improve living standards of low-income group or to support underperforming sectors. World Bank and ADB want removal of power subsidy at the earliest.

Slowdown in industrial production brought down the revenue graph of government last fiscal year. Government set a target to increase the revenue by 0.4 percent of GDP in FY09 and rather it achieved only 8.8 percent. Total net collection by Federal Board of Revenue during July-September (2009-10) improved merely 0.2 percent with direct taxes exhibiting 4.7 percent negative growth and customs 13.4 percent. Total net collection was Rs262.6 billion as against Rs262.1 in July-September (2008-09). Annual tax target is Rs1380.

Growth in LSM in July-August is attributed mainly to leap jump (18.8 percent) in production of cement due to rising internal and external demands. During two months, cement production stood at 5,344,000 tons in contrast to 4,499,000 tons in July-August FY09. In August, cement production registered 25 percent increase over July. During two months, motorcycles and tractors productions grew 30.7 and 27.8 percent respectively. Production of power looms leapt 50 percent. According to Pakistan Economic Update, PIDE (Pakistan Institute of Development Economics) business barometer survey conducted to have projections about business outlook of companies listed in Karachi stock exchange found out that 60 percent respondents expected higher production for July-December 2009. High growth of manufacturing sector that is an important GDP driver after agriculture is necessary to achieve economic growth target of this financial year. If rest of the months manufacturing sector grows it is possible to gain annual growth rate and in other words to break long spell of regression. But, given the political and security challenges this may be difficult. A homegrown remedy can enervate impacts of challenges. Reducing tax evasion, power pilferage, and subsidies exploitation is that.