ISLAMABAD: The caretaker government has reportedly prepared a plan to reduce industrial tariff by up to 25 percent but this requires International Monetary Fund’s (IMF) approval which was previously denied for the winter package, well-informed sources told Business Recorder.
Caretaker Minister for Power and Petroleum, Muhammad Ali, sources said, shared Power Division’s plans with the Apex Committee of Special Investment Facilitation Council (SIFC) on Wednesday.
The entire industry including five zero-rated industries have already approached the caretaker government to lower electricity tariff across the country to lubricate industry’s wheels, render our exports competitive and create jobs. It will also give a push to GDP growth.
High power tariff for industrial sector criticised
The sources said industrial consumers are cross subsidizing domestic consumers by approximately Rs 300 billion per annum. However, tariff of residential consumers, will be increased marginally by withdrawing cross subsidy. Charges for domestic consumers of three phase meters will also be rationalized.
According to sources, tariffs of category B1, B2, B3 and B4 will be reduced from 15 per cent to 25 per cent, in addition to rationalization of their fixed charges.
Pakistan Business Council (PBC) argues that high power tariffs discourage consumption by honest consumers and creates a higher incentive for theft by others. Net result is more unutilized generation capacity, higher capacity charges and further pressure on circular debt. Lower tariffs do the reverse.
With substantial unutilized generation capacity, marginally reducing prices of power for productive sectors of the economy such as industry, leads to higher employment and economic activity, which also generates tax revenue and exports.
All Pakistan Textile Mills Association (APTMA) maintains that textile industry has an export capacity of $2 billion per month, of which an estimated $650 million export industry is closed.
“If electricity prices for exporters continue to remain high, a growing number of firms will be forced towards closure,” said the Association.
APTMA, in its letter to newly appointed Additional Secretary Incharge, Asad ur Rehman Gilani noted that during 2020-2022 when zero-rated industries were provided with Regionally Competitive Energy Tariffs (RCET) of 9 cents/kWh, textiles and apparel exports witnessed a record growth of 54 per cent - from $ 12.5 billion in FY 20 to $ 19.3 billion in FY 22 in only two years.
However, as RCET was withdrawn amid a larger macroeconomic crisis and power tariff were rebased following the IMF 2023 Stand By Arrangement, power tariffs for export-oriented firms increased to over Cents 14/kWh and industry could not sustain this momentum, causing textiles and apparel exports to plummet to $ 16.5 billion in FY 23.
The textiles and apparel sector continues to face significant challenges due to prohibitively high and regionally uncompetitive energy prices and export-oriented firms are unable to compete in international markets.
At over 14 cents/kWh power tariffs for industrial consumers in Pakistan are almost twice the average faced by competing firms in regional economies like Bangladesh, India and Vietnam.
They include an inter and intra Disco cross-subsidy of around Rs 5 cents/kWh representing the government’s social welfare-rated obligations and power sector’s inefficiencies that cannot be passed on to the consumers in international markets and therefore renders Pakistan’s exports uncompetitive.
Moreover, at 9 cents/kWh energy costs account for 12-18 % of total input costs across the textiles and apparel value chain.
“Our estimates’ based on actual data of publicly listed firms, suggest that when power tariffs increase from 9 Cents/kWh to 14 Cents/kWh, average firm profitability decreases from around 8.61 per cent to only 1.00 per cent. In a high – volume- low-margin business like textiles and apparel, such a drop in profitability causes a server loss of competitiveness and a sharp reduction in the volume and value of exports,” APTMA further noted.
Copyright Business Recorder, 2024
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