Increase in electricity rates sparks chain reaction

KARACHI: The government’s recent increase of Rs5/litre in petrol (motor spirit) prices is “no biggy” as was asserted by the entire influencer marketing crew but it sparks a chain reaction, multiplying the impact for businesses and the general public alike.

Yes, there are uncontrollable international factors involved but the authorities cannot be absolved of mismanagement and inefficiency. Business leaders who had been cheering formation of the PTI government once, are now finding it difficult to manage the rising fuel costs, and even then supply outages.

The Pakistan State Oil (PSO) and Pakistan LNG Limited, government’s authorised LNG importers, successively scrapped recent supply tenders because of higher offered rates, which is reflected in the supply breaks.

Sustainable and affordable electricity is a key prerequisite for the socioeconomic development of any country. In fact, the economic growth of any country is directly linked with the availability of safe, secure, reliable and cheaper supply of fuel and electricity.

The existing energy mix of the country is heavily skewed towards the thermal power plants, mainly operating on imported fuel. The import of fuel for electric power generation not only causes depletion of the precious foreign exchange reserves but jacking up the deficit, i.e., weakening currency and pushing up inflation.

The government has recently imposed an advance income tax to be collected with the electricity bills in the range of 5 per cent to 10 per cent.

Analysts are confused, on the one hand, the government asserts surplus electricity and high capacity payments, but on the other, policies discourage consumption of electricity on the grid by imposing more extortionate taxes.

The electricity costs are already the highest in the region. Currently, taxes make up a third of the total electricity cost paid by the customers, which will further increase the cost. Such measures would deter growth and people will suffer more.

However, in a developing country like Pakistan, a reliable, uninterrupted, and affordable energy supply is a fundamental precondition for reducing poverty, encouraging investment, and boosting economic growth.

Because of poor energy management, Pakistan’s energy resources have been used inefficiently for decades. As a result, the nation faces a serious energy crisis that has often stymied manufacturing and the service sector and disrupted power supplies in communities and households across the country.

Fortunately, Pakistan has a high renewable energy potential, which has been elaborated in many studies on Pakistan.

A USAID report endorsed Pakistan’s energy potential and said that it can potentially produce 100,000MW from solar energy alone. Despite the potential, Pakistan remains power starved when it comes to adequately powering lights for its homes, machinery for its factories, and stoves for its kitchens.

Data from many sources, including the Ministry of Water and Power and Pakistan Economic Surveys, over the last five years show that Pakistan has been facing an average shortfall of between 4,000MW to 5,000MW.

This acute energy crisis is a result of flawed energy policies pursued for decades, the high cost of generation, and aging and inadequate transmission, among other causes.

Politicians and policymakers in Pakistan have made little real attempt to diversify the nation’s energy supplies and to shift dependence from expensive and imported oil towards potentially cheaper and cleaner resources available in the country.

But better late than never, Pakistan has started to acknowledge its renewable energy potential as evidenced by the construction of Quaid-e-Azam Solar Park, with a nameplate capacity of 1,000MW. There is a need for more additional steps beyond the solar park. In fact, all these steps should be part of a multipronged “energy productivity” policy.

By encouraging energy conservation (efficiency), on the one hand, and facilitating a move towards clean renewables, on the other, the productivity policy will not only enhance the energy security but also improve the environment.

Minister for Energy Hammad Azhar had said that Pakistan’s gas reserves were depleting at an alarming rate of 9 per cent/annum, while the energy needs and the size of the population were growing.

“To bridge the gap, we import LNG from abroad but there are two major issues with that practice. Firstly, we have no LNG storages and; therefore, the cargoes must be perfectly timed. That is the reason the current supply chain has no flexibility,” he added.

Businessmen Panel chairman Mian Anjum Nisar said that there was no denying the fact that oil rates had been on the rise in the international market now, but the government instead of passing on this surge to the public, could reduce the number of taxes on the petroleum products, as the fuel was the engine of growth.

“If fuel would be heavily taxed, the entire economy would suffer unprecedentedly.” Petrol and high-speed diesel are two major products that generate most of the revenues for the government because of their massive and yet growing consumption in the country. Average petrol sales are touching 750,000 tonnes/month against the monthly consumption of around 800,000 tonnes of high-speed diesel.

“The economy is already in a precarious situation, this constant back and forth will only increase volatility, when we ought to be heading for stability. The cost of doing business and the cost of production have shot up to the level of uncompetitiveness. The cost of borrowing was huge and capital financing has become more expensive,” Nisar said.

Pakistan Apparel Forum chairman Javed Bilwani said that the costs had increased significantly in the last couple of years, which not only trimmed their earnings but also made it difficult to compete with the regional peers.

“[The] export-oriented industries can’t afford power and gas outages. Production cannot be stopped, so we have to make alternative arrangements, which requires additional cost and energy,” Bilwani added.

Expressing annoyance, Bilwani said: “We are paying taxes but there are no facilities. We cannot rely on the government. No one has confidence in the Sindh government.”

Bilwani, a leading garment exporter, said that the textile sector exports were increasing, as there was an abundance of orders.

“A momentum has been built, and it is the high time that the government supports the textile sector through ensuring uninterrupted supply of utilities at affordable rates.”

The exporters were faced with certain other challenges such as shortage of export containers and unavailability of vessels. “These problems are manageable but the rising fuel costs due to insufficient supplies quite adversely impact the business.”

KASB Securities managing director A A H Soomro said that the rising fuel prices due to increasing global coal, LNG and oil prices had direct implications on the cost of doing business and the cost of living.

“Fearing political implications, the government hasn’t been able to pass on the true cost that is ramping up the circular debt. The menace is getting bigger day-by-day.”

“We have surplus energy that is being rightly offered at marginal costs, while businesses are finding it difficult to pass on the costs due to the government’s pressure to keep prices sticky.”

Soomro said that in a global commodity inflation cycle, it was wiser not to hope for the prices to fall, but manage the flow of dollars.

“By lowering the commodity prices and intervening in free markets, the businesses will get perturbed and import bills will not be normalised.”

Shams Burney, a leading transporter said that the government was inflicting blow after blow. “Electricity prices have shot up to record levels, fuel prices have been increased to record levels, and these hikes are reflected in the rising prices of daily use items.”

“When fuel prices increase, everything goes up and not in the same proportion. [The] government raised petrol prices by Rs5/litre but the impact will be north of Rs15/litre for the traders because the transporters do not increase the fares in the same proportion.”

Burney said: “Higher fuel and electricity prices inflate [the] cost of production and the sale price; therefore, which would impact the demand.”