If the IMF is not pushing for something, it almost never happens in Pakistan. People have been wondering why Pakistan authorities have failed to announce the revised natural gas prices that have been long due, despite being under the IMF Stand-By Arrangement (SBA). The quick and simple answer is that gas price revision does not make the list of quantitative performance criteria, or structural benchmarks.
The gas sector does get attention in the IMF report, as the so-called gas “circular debt” fast catches up with that of the power sector – but the IMF stayed short of requiring the government to increase tariffs at a specific cut-off date, unlike very clear guidelines for electricity. It is common knowledge that Pakistan prices natural gas, especially for domestic usage, very low. Other users have had to cross subsidize domestic usage. It should never have been this way.
The reluctance to increase any administered price almost always rests in the lack of political will – and gas pricing is no different. Only that, of all controlled prices, gas is perhaps the easiest to increase, given the social and economic impacts. Pipeline natural gas is a luxury that only one-third households in Pakistan afford – unlike electricity that has over 90 percent of households connected, with an 86 percent village electrification rate.
Pakistanis spend more on firewood than natural gas for their heating requirements. Nineteen percent of the fuel expenditure, as per Household Integrated Economic Survey 2018-19, is made on firewood, versus 14 percent on gas. For rural consumers, the difference is starker, with 29 percent of fuel spending made on firewood, to 12 percent on gas. The old-school methods of using dung cakes, agri waste, and cotton sticks combined have a higher share than gas in total rural fuel spending.
The point to make here is that the majority of the country has been using alternate fuels for heating since forever and the price differential is massive. Keep in mind that a large number of firewood users invariably fall in the bottom two quintiles – where they pay in today’s price - $5.66/mmbtu, with firewood priced at Rs1093/40kg. Compare this with the price that natural gas users in the bottom two quintiles pay - $0.7/mmbtu – at a delta of eight times. Even after the previous round of increase in gas tariffs with higher incidence of fixed rates and 18 percent GST – the average domestic natural gas tariff at $3/mmbtu is almost half of what firewood users pay today. Only the highest natural gas consumption quintile pay more in heating value terms than firewood users.
In more urban settings, firewood is not always the option, and households then opt for LPG (mostly in northern parts of the country. The price they pay today in heating terms is $20/mmbtu. Heating requirements are not believed to be highly elastic with price changes – and steadily increasing LPG usage despite a substantial increase in retail price is evidence.
So, when the majority of the populace is paying substantially higher prices for heating – why should those connected with pipelines continue to be heavily subsidized? Mind you, the gas sector payables are now close to that of the power sector – and some of it emerges from the government’s inability to blend the price of domestic and imported gas (altogether another subject).
It must be noted that natural gas price increase has caught up with that of LPG and firewood, only very recently – having stayed well below the price increase for the other two fuels for five years between fY19-FY23. The disparity is so huge at both economic and social levels – that it must be addressed as a priority. The backlash in realistic terms, even if one is worried about the political aspect, will be limited – given it only affects one-third of the households. Starting with blending the price with imported gas would not be a bad idea.
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