STRESSED-OUT ENERGY SECTOR IN NEED OF FINANCING
TARIQ AHMED SAEEDI
Sep 26 - Oct 2, 2011
While the energy sector is in dire need of funds to stand on its own feet, banks' funds are still mainly flowing in some other direction that is not only unproductive, but also leaving a question mark over the role of banks in economic growth. Inefficiency, corruption, underdevelopments, and above all funds scarcity have been, with combined force, marring the performance of the energy sector for years.
The performance decline stagnated for a certain period and observed recess for instance when national energy demands used to be low as compared to its supply. As population grew larger and industrial energy demands increased, supply went insufficient.
In the present circumstances when the energy sector is poorly managed and snarled up in the circular debts, financial institutions can come to its rescue by extending short, medium, and long terms loans for production projects as well as transmission and distribution infrastructure developments.
Financial sector can play an important role in overcoming the energy crisis as acting governor State bank of Pakistan (SBP), Yaseen Anwar, said a main beneficiary of the performing energy sector would also be banks. "An early resolution of this [energy crisis] critical issue is in the interest of all, including the banking industry," he said.
Why the head of the central bank mentioned the benefits of banks in the resolution of energy crisis was because of the circular debts that energy companies owed to each other and banks. A vicious circular debt unravels impacts on the financials of all the stakeholders. Until August, Rs300 billion circular debts were to be cleared. Of late, a ministry of finance official, in a media report, hinted at frequent increases in the electricity tariffs the government had planned to get rid of Rs240 billion debts.
The incumbent government always acts smart to pass on financial burden to public and hold on bounties, for example, in the wake of decline in petroleum prices.
Seemingly, it is devoid of prowess to deal with the situation of that ilk. A cliché suggestion has done round in the media and meetings that the government has to generate revenue so that it should not resort to market's liquidity to meet public expenditures every now and then.
Experts see the circular debts as a key deterrent to investments in the energy sector. In a discussion with the acting governor, chiefs of banks agreed that the issue of circular debts could be resolved by meeting the short-term liquidity needs of the independent power producers (IPPs) that had recently threatened the government to disconnect supply to power grids in case of non-payment of dues. The issue appears on the disgusting electricity landscape every now and then. Now, it is time the government should rake its brains out for a permanent solution.
Renewable energy sector, Thar coal, and oil and gas explorations need financial supports from the financial institutions. These sectors have proven potential to get the economy out of mess as well as secure energy future for many decades to come.
Bank lending constitutes the prime form of monetary aggregation since capital market in Pakistan has yet to develop at equivalent to that in the developed economies.
Unfortunately, much of the loans from banks end up in the government development and non-development expenditures. The public borrowing did not come to the halt until last fiscal year ending on June 30, 2011, causing inflation to reach 13 per cent. It is worthwhile to note that bank lending also known as monetary expansion rose significantly 14 per cent during the last fiscal year. But, instead of being an elixir of economic growth that would have been the case were lending destined to the private sector, the monetary expansion stoked the inflationary pressure.
The banks preferred to lend to the government because of the minimal risks involved in it and found lucrative aggregation of assets in government's papers. The result is crowding out of private sector as maximum flows of funds are directed towards public sector. Analysts said the usage of credit by the government is not only productive but wastrel in the face of economic hardships. The funds that could better be utilised to spur the economic growth are put into feeding lose-making public sector enterprises, other non-development expenditures, and bolstering military strength.
Because of unabated profligacy at the expense of depositors, economic growth continued to slide downward-only last year dropped to meagre 2.4 per cent. Has it affected banking sector? Of course not. Banks are racking in profits. Their prime role in economic development is conspicuous in absence.
In 2010-11, private sector was sanctioned Rs2.76 trillion whereas the government drew Rs2.99 trillion from commercial banks and the state bank of Pakistan. The scheduled banks' net loans to the government skyrocketed to Rs1.814 trillion. The portions of credit allocated to the energy sector in FY11 were lower than the loans extended to farm sector, large scale manufacturing, and textile sector. According to data compiled by the state bank of Pakistan, outstanding loans to electrical machinery and apparatus stood at Rs528 billion and to electricity, gas, and water supply at Rs2,839 billion at the end of 2010-11. Outstanding credit to private sector was calculated at Rs34,389 billion.
Unplanned urbanization is also one of the prime drains on the energy sector. According to Economic Survey 2010-11, while 37 per cent population of the country lives in urban areas, yet there is a rapid migration of people from rural areas to urban centres 'making the cities dysfunctional'. Apart from having serious implications for environment, resources, and civic administrations, this unplanned urbanization is exerting enormous pressures on weak infrastructure, it noted.
The energy sector needs constant flows of investments for employment generation and domestic economic building. It is worthwhile to mention here that a World Bank's recent report extrapolated a hefty loss of two billion dollars per annum to the economy due to stressed-out power sector. The power crisis has rendered 0.2 million workers unemployed. The sector will require $32 billion collective investments until 2020 to remerge hale and hearty.