ECONOMIC GROWTH DRIVEN BY ENERGY

TO OVERCOME RISING ENERGY COST, PAKISTAN WILL HAVE TO CHANGE ITS ENERGY MIX.

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
Apr 11 - 17, 2011

There can't be two opinions that economic growth of any country is heavily dependent on uninterrupted supply of energy products at affordable cost. Ironically, Pakistan faces highly erratic supplies as well as persistent rising trend in electricity and gas tariff. It may be true that global prices of crude oil is crippling even the energy rich economies, but woes of Pakistan are because of gross mismanagement prevailing in the energy sector.

The successive governments have failed in increasing domestic production of crude oil and gas, coal mining of and constructing hydropower projects. They have also been victim of misplaced priorities i.e. development of alternate energy products, having the least realization that most of these projects are capital intensive and resource mobilization is one of the key problems facing Pakistan.

On top of this, electricity and gas tariffs are raised regularly in the name of recovery of full cost but least efforts are being made to contain theft. Transmission and distribution losses of electricity distribution companies hover around 40 per cent. Similarly, gas theft is estimated over 300mmcfd, enough to keep all the fertilizer units of the country running round the year. The only regret is that those condoning electricity and gas theft are thriving but masses are paying the plundered amounts through their noses.

Lately, Faisalabad was the worst victim of gas load shedding and the situation remains far from satisfactory despite end of winter and turning off heaters and geysers. According to Gohar Ijaz, Chairman All Pakistan Textile Mills Association (APTMA) presently all 225 of the member units remain closed for three days during a week due to non-availability of gas.

This is despite President Asif Ali Zardari constituting a committee to oversee gas load management plan for industry and Sui Northern Gas Pipelines Company (SNGPL) being told not to undertake any gas load management without the approval of this committee. The members of committee for gas load management include Syed Khursheed Shah Federal Minister for Religious Affairs, Raja Pervez Ashraf MNA, Anwar Saifullah, Secretary Ministry of Petroleum & Natural Resources, Gohar Ijaz, Chairman APTMA and Managing Director SNGPL.

The gravity of situation can be gauged by looking at the woes of textiles and clothing industry. The government with the support of industry aims at exporting textiles and clothing products worth US$4 billion during April-June quarter. However keeping in view the current volume of gas supply, exports are not likely to go beyond $2 billion during the quarter.

Pakistan also aims at achieving food security by enhancing production and yield of various crops. The policy planners are fully aware of the fact that the cultivable area of Pakistan suffers from shortage of nutrients, which has to be met by applying appropriate dosage of urea and DAP. Despite this, the government decided to suspend gas supply of units linked to Sui twins for 45 days and curtailing supply by 20 per cent of the units getting gas from Mari field. In response to this urea, manufacturers promptly increased the price by Rs190 per bag. Similarly, DAP price has been increased due to rise in its international prices.

Lately, due to unrest in the Middle East and ongoing attacks on Libya by NATO forces price of crude oil is also on the rise. The government decided to increase prices of POL products up to 13 per cent effective April 01, saying the prices would be rationalized shortly. However, hike in furnace oil and high-speed diesel is likely to fuel inflation. Hike in furnace oil price will compel electricity distribution companies to resort to raising tariff and increase in high-speed diesel price would require upward adjustment in transport cost and bus fares.

In such a compelling scenario, the government has limited options available. However, when it allows hike in electricity and gas tariffs the natural outcome is rise in inflation rate. Ironically, in Pakistan policy makers have been raising interest rates to cap inflation and the practice has proved counterproductive. While there has been no letup in inflation, higher interest rate has two fallouts: 1) rise in inflation and 2) disincentive for making fresh investments.

Since the government remains the biggest borrower, also offering yields on Treasury Bills close to the discount rate. This encourages banks to invest more in government papers ad lend less to the private sector. One really fails to understand the logic behind keeping interest rates high, because this jacks up cost of borrowing for the government.

The policy planners must pay attention to what Shahid Kardar, Governor State Bank of Pakistan has said lately. He has pointed out that inflation, budget deficit and limited availability of credit for the private sector remain the key concerns. He has also suggested the remedy for overcoming budget deficit by broadening the tax base by removing all tax exemptions.

He also expressed his concerns on 'structural shift' of incomes towards the untaxed sectors. With this shift of incomes away from the tax paying sectors to non-tax paying sectors, the tax to GDP ratio is likely to go down. He has rightly suggested that the shift needs to be addressed in the next budget. All sectors of the economy need to be taxpayers beyond a certain level of income irrespective of the source of income.

One of the major concerns of the masses is that the government has not abandoned the idea of imposing the Reformed General Sales Tax and the government has already committed with the IMF and the idea can't be shelved. RGST is not off the table and it seems very much on the agenda for the next budget.

A point offending the masses most is that the present regulars are bent upon introducing new taxes but not ready to follow austerity. Some violent demonstrations were staged when government increased POL prices and it seems highly likely that opposition and coalition partners may once again fire broadside at the decision.