The import bill

The higher import bill and current account deficit (CAD) noted in recent months poses serious risks to the macroeconomic outlook, particularly Pakistan’s Balance of Payments. This has highlighted the need to take holistic action in achieving a trade balance, as both imports and exports present us with their own unique set of dynamics. While our last article pointed out why the expansion and development of exporting industries is essential for a healthy Balance of Payments, it is now important to adjust our lens to analyze the other side: excessive imports.

The highest items of imports in July 2021 were of petroleum and crude products. Data from the Ministry of Petroleum revealed that total imports of oil and refined fuels went up by 24percent to about 10 million tonnes in the financial year which ended in June, and has increased exponentially thereafter.

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                                                               % Change Aug 21-Aug
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Major Groups                        Aug-21              Aug-20                  20
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Petroleum                        1,756,835             770,588              127.99
Agriculture and
Other Chemicals                  1,220,866             548,671              122.51
Machinery                          984,586             645,607               52.51
Food                               826,016             451,654               82.89
Metal                              511,147             279,248               83.04
All Other                          472,638             219,469              115.36
Textile                            372,804             218,344               70.74
Transport                          355,636             106,241              234.74
Misc                                92,785              75,874               22.29
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Grand Total                      6,593,313           3,315,696               98.85
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Source: PBS

The recent swings in LNG pricing have highlighted the detrimental impact of import dependence on balance of payments and energy security. Minimizing import dependence on hydro-carbons in particular should be a primary objective. While export-led economic growth is critical for achieving a trade balance, efforts to curtail excessive imports, while identifying more sustainable sources of energy and expanding domestic petroleum production, are equally of essence.

Pakistan’s economy is critically dependent on energy security, as access to affordable and consistent energy is the baseline for economic activity. The country is now facing another severe energy emergency wherein the coming winter months: gas shortage will persist, leading to industrial shutdowns as well as domestic unrest. While Bangladesh provides us with an example of efficiently utilizing existing resources, the gas sector of Pakistan is in dire need of making a critical turnaround, which requires vision, authority and leadership. Effectively carrying out a petroleum exploration drive can lead to significant increases in domestic gas supply.

Enhanced exploration must include wildcatting, a necessary measure to open up new areas and generate more exploration plays, as most of our exploration has been focused along already saturated areas. Furthering Pakistan’s exploration drive will require domestic petroleum companies to increase their exploration budgets manifold. In addition to a completely fresh outlook towards exploration, a sea change is required in the manner in which these companies are run. One such location which has potential yet remains largely untapped is Block 28, where a total of six structural prospects seen on satellite images are largely defined, while each possesses reserve potential of around the same as the giant Sui Gas field.

Industrial competitiveness requires a stable energy supply at affordable rates. A case in point is India where industry-led economic growth has been aptly prioritized through the provision of competitive and consistent inputs to industries. The priority order for gas consumers of India is the reverse of Pakistan’s, with industrial energy provision at the top and domestic at the bottom, i.e. when shortage occurs, gas is first supplied to industries and cut for domestic consumers. The same case exists for electricity. It is essential to note that industries such as fertilizer and steel are highly dependent on gas. Furthermore, the currently proposed moratorium for supply of gas to captive power plants runs counter to the economic argument.

Pakistan’s favouring of domestic over industrial consumption is a classic case of prioritizing short-term consumer satisfaction over long term economic stability. Political influence plays an important role here, as appeasing voters with promises of the steady provision of energy is commonplace. Subsequently, the present allocation of gas resources is highly unsustainable for the economy in the long term. Policies must be reassessed keeping in mind the objective of achieving a healthy and sustainable trade balance.

Due to load profiling of the domestic sector, up to 1056 MMCFD of Natural Gas was supplied in January 2021 in SNGPL System even though the indigenous gas supply for system input is only around 765 MMCFD. In the short term, higher supply is required in order to rationalize the domestic gas market, along with measures to manage demand.

Due to high investments in gas fired power plants, especially RLNG-N combined cycle, imports of energy rose sharply in Pakistan, thereby projecting that domestic production is in sharp decline (8.6% year on year FY 19 to FY 20). This coupled with inflated demand from the domestic sector, where pricing is not based on economic principles of scarcity and optimal utilization makes, sharply increased the country’s dependency on imports of LNG. The bottom-line is that it is illogical for a cash-strapped country like Pakistan to compete in the global supply market where other players include Japan, China, South Korea and Europe.

The reasons for tight supply of LNG include the rebound of the global economy from Covid-19, the use of LNG as a transition fuel due to its low carbon footprint and compatibility with intermittent renewable energy, low hydro generation in some countries and low wind generation in Europe (seasonal), low Chinese and European storage levels, Chinese demand for gas to power, China’s trajectory set to overtake Japan as the number 1 LNG importer.

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                                   Gas Conservation Measures &Potential Impact
========================================================================================================================
Sr       Energy              High         Scale of      Quantitative     High        Barriers                   Possible
         Efficiency          Medium       Impact        Energy           Medium                                Solutions
         Measures            Low                        Saving           Low
                                                        Estimate
========================================================================================================================
1        Tuning              Very H       Domestic      400-600          H           Currently                SNGPL/SSGC
         Domestic                         gas           MMCFD                        not mandated       to take the lead
         Gas                              demand                                     to any                and outsource
         Cooking                                                                     organization,
         burners                                                                     but a
                                                                                     national
                                                                                     requirement.
2a       Conversion          H            Domestic      360              H           Funding                Concessional
         of domestic                      gas           MMCFD                                                 Finance by
         gas                              demand                                                                 SBP for
         water-heaters                                                                                      installation
         to solar                                                                                            and recover
                                                                                                                 cost on
                                                                                                             instalments
2b       Insertion           H            Domestic      200              H           Funding                    SNGPL to
         of cone                          gas           MMCFD                                                  undertake
         baffles and                      demand                                                          responsibility
         tuning
3        Efficient           M            SNGPL         100              M           Funding                    SNGPL to
         space                            gas           MMCFD                                                    provide
         heaters                          demand                                                               efficient
                                                                                                              heaters on
                                                                                                             instalments
========================================================================================================================

To offset the conundrum of tight supply and expensive imports, measures must be taken to improve efficiency, as distribution losses in Pakistan’s power sector are approximately 18%, twice the international norm, whereas the UFG equivalent of direct losses is 14% — 7 times the international norm. Natural gas resources, which currently contribute 50% to Pakistan’s total energy supply, are depleting rapidly and those discovered are not being used efficiently. According to the Council of Common Interest (CCI), severe shortages of gas have been predicted in the coming years. A shortage of roughly 500 MMcfd is expected during the winters of 2021-2022, which will inevitably shut down industries for at least 2-3 months and severely contract economic output. Irrespective of the shortage, the government must ensure uninterrupted supply of gas to the export-oriented sector to avoid large scale forex borrowing, which would become unavoidable. If economic growth is to become a national priority, the direct and indirect effects of the natural gas crisis must be assessed while simultaneously formulating a timely and efficient long-term action plan.

Pakistan has the potential to save up to 10-15% (10-12 MTOE) of primary energy supply through energy efficiency, but residential gas consumers have a limited incentive to shift to more efficient appliances because of low gas prices the lowest slab at Rs.120/MMBTU. Reducing the consumption of gas at consumer level by improving efficiency can lead to significant savings on bills as well as decreasing pressure on the government to make the scarce resource available. Making the use of cone baffles and gas geysers mandatory can enhance efficiency by saving up to 30 percent gas.

While it is essential to tackle Pakistan’s acute gas shortage, we must do so without compromising Pakistan’s trade balance. Diverting LNG towards domestic use rather than industrial use does not allow for any financial recovery, the impact of which on economic growth has been impressive. Meanwhile the domestic sector is cross-subsidized by industry and other sectors, thus creating severe financial constraints and a gas sector circular debt. The government must strive for a more efficient gas sector while also formulating policies that are conducive to industrial sectors’ growth and the critical role played by exports for the economy of Pakistan.

Copyright Business Recorder, 2021