The new government would not be able to do any overnight miracles. However, one sector where it can provide immediate relief is energy and power sector
By Dr Abid Qaiyum Suleri
One prediction can be made with quite accuracy, i.e., economic challenges facing the next government are quite severe. I wish I am wrong, but to my understanding, both the people as well as government of Pakistan would continue to face tough time over economic and energy issues.
The GDP of Pakistan kept on following boom and bust cycle for the last many decades. The last boon in the GDP was in 2005, it declined in 2006, improved in 2007 and since then it is nose-diving. Due to various factors (including political instability, floods, power crisis, reduced foreign direct investment etc.), the last five years’ average GDP growth is around 3 per cent.
This growth is mainly consumption driven and (after a recent change in the base year for national income accounts) services sector contributes a major share in our GDP (50 per cent), followed by agriculture (23 per cent), and mining, manufacturing, construction and energy, gas and water supply (21 per cent).
Services sector can only absorb highly skilled and literate human resources. Large scale manufacturing is badly affected due to energy crisis, hence agriculture remains the last resort of our labour force. Thus the sector with maximum contribution to our GDP cannot offer livelihood opportunity to our major labour force. This is only one aspect of our economic framework, other indicators are not promising either.
Thus investment as per cent of the GDP declined from 22 per cent in 2007-08 to 12.5 per cent in 2011-12. During 2011-12, negative terms of trade led to negative contribution of net exports. During last five years, national fiscal health remained challenged by chronic issues like ineffective taxation system, debt hit power sector, sick public sector enterprises, governance issues, natural and manmade disasters, and security situation. Tax to GDP ratio fell from 11.1 per cent in 2007-2008 to 10 per cent in 2012. In the same period, the FBR tax to GDP ratio fell from 10.3 per cent to 9.1 per cent. Thirty per cent of the entire tax collection came from POL at various stages.
Chronic misuse of statutory regulatory orders (SROs) remained unabated during the last five years too. Sixty per cent of tariff lines have different tariff rates for different importers through SROs. Despite last year’s budget announcement of having a uniform general sales tax rate (GST) in the country, we continue to have multiple rates ranging from zero sales tax to 22 per cent on certain products.
Low tax to GDP ratio, power sector circular debt (around 480 billion rupees), stocks of unpaid commodity, tariff differential subsidy, unplanned bailouts to public sector enterprises, and natural and manmade disasters led to fiscal deficit which averaged 7.3 per cent during the last three years and may jump up to 10 per cent in current fiscal year. Domestic borrowing remained a major source of financing fiscal deficit, thus crowding out the private sector. Liquidity crunch and power crisis has virtually crippled the private sector, thus negatively affecting new job creation among many other things.
Next fiscal year would start with the foreign exchange barely sufficient for one month’s imports (around 5 billion dollars) and with IMF payment of US$3.8 billion for 2013-14. So maintaining balance of payment would be one of the first challenges on economic front facing next government. Mammoth fiscal deficit would negatively affect the next government’s availability to spend. The next government cannot default on debt services, would not reduce defence and security expenditures, and most likely would have to increase day-to-day administration expenditures to keep all allies happy. Thus, it is very clear that brunt of fiscal deficit would be faced by public sector development programme or, in other words, the people of Pakistan.
The new government would not be able to do any overnight miracles and most of the economic miseries would remain unchanged irrespective of the fact who comes to power. However, one sector where, if it puts its acts together, the new government can provide immediate relief is energy and power sector. Economic and energy growth figures reveal that energy growth follows high GDP growth and vice versa. This is a vicious chicken-egg situation, where we cannot generate enough electricity because we don’t have enough fiscal cushions and our economy is crippling because we don’t have enough energy to meet its requirements.
On electricity generation, our energy mix is highly skewed to fuel oil. In 2005, 27 per cent of our electricity was being generated from oil and 51 per cent from gas. Today we are producing 44 per cent from oil and 16 per cent from gas. Fuel oil was US$20 per barrel in 2005, today it is US$110 per barrel. Oil prices are up 93 per cent from 2008 to date and Pakistan spent US$12 billion in oil imports last year. This energy mix may suit the Gulf countries but certainly not a country like Pakistan.
Among our neighbours, India generates 1 per cent of its electricity from oil, whereas Bangladesh generates 13 per cent electricity from oil. Obviously, due to expensive energy mix, per unit cost of production of electricity in Pakistan is expensive. NEPRA determined average tariffs are Rs 12.5 per KW/h, whereas average applied consumer tariffs are Rs 9.16 per KWh. Thus on an average, we are losing Rs3 per KWh (per unit). This has to be subsidised by the federal government through Tariff Differential Subsidy which is a contributor to fiscal deficit.
The new government would have to face the problem of fiscal management and electricity management. All mainstream political parties have promised to resolve economic and energy crisis. But how would they do it?
The average per unit of electricity (KWh) price in Pak rupees for consumer in India is 7.36, for a consumer in Bangladesh is 5.47, while for a consumer in Pakistan it is 9.16. Our consumer has to pay more than what a consumer in India and Bangladesh pays per unit of electricity used. This is despite the fact that we are subsidising our electricity. We cannot keep on subsidising the electricity, but we cannot keep on increasing the consumer tariffs either. The only way out is to reduce our cost of electricity generation and improve its efficiency of transmission and distribution.
Despite stagflation, demand for electricity and gas is increasing. There is no sizeable capacity enhancement in energy exploration in the last decade. Independent Power Producers (IPP) are running below their capacity (and many of them have closed down) as they are not getting their receivables from the government, whereas the government owned power generation plants (Gencos) are running on one third of their efficiency level. On an average, the IPPs are three times more efficient than Gencos.
An improvement of 5-10 per cent energy efficiency will save about US$200-300 million per annum and availability of additional thermal Mega Watts of generation too. This is something where NEPRA would have to set benchmarks for the generation companies. A decision on performance-based allocation of fuel to generation plants would do the trick. Likewise, most of the electricity distribution companies are incurring huge transmission, distribution and collection losses. Transmission losses are much beyond the NEPRA permissible limit and according to caretaker Minister for Water and Power, these additional (beyond the NEPRA’s benchmark) transmission losses are equivalent to the total electricity requirement of KPK and Balochiostan.
Third major challenge facing the electricity sector of Pakistan is recovery of bills. Sukkur electricity distribution company, Quetta electricity distribution company, Hyderabad electricity distribution company and Peshawar electricity distribution company are among the maximum collection losses. In some instances, it is up to 80 per cent.
Most probably the next government would shift the responsibility of this crisis to its predecessors and would do nothing to resolve the issue using the excuse of lack of fiscal cushion. However, all the new government requires is to plug leakage in fuel supply system, to turn generation plants efficient, and to minimise transmission and distribution losses.
Once the next government would take these short term measures, it would be able to concentrate on certain medium to long term measures including taking care of circular debt; promotion of renewable sources of electricity generation; and breaking the monopoly of WAPDA through encouraging private sector to generate and distribute electricity in a competitive regime (under a strong NEPRA).
We have been politicising the issues of economy and energy for quite some time now. Let us hope that the new parliament would use its political wisdom to resolve these issues.
The writer is executive director of Sustainable Development Policy Institute and may be contacted at firstname.lastname@example.org