Deindustrialisation amid rising energy costs

Against the backdrop of unaffordable energy tariffs, the government is taking a significant step by proposing to lower the electricity tariff to 9 cents. This reduction is expected to naturally encourage people to switch to grid electricity for commercial reasons as the captive power electricity at current gas pricing costs more than 10 cents. This is crucial for Pakistan, where gas is a scarce resource.

For context, Pakistan’s energy tariffs are notably higher than those of regional counterparts, potentially undermining its industrial competitiveness. With electricity tariffs at 17.5 US cents/kWh, Pakistan exceeds Vietnam’s 7.2, Bangladesh’s 8.6, and India’s 10.3 cents/kWh. The disparity is even starker in gas tariffs, where Pakistan’s blended rate is 12.4 US dollars/MMBtu, compared to lower rates in Vietnam, India, and Bangladesh. These high energy costs, particularly for sectors like textiles and apparel, put Pakistan at a significant disadvantage, threatening the viability of its industries in the global market and calling for policy recalibration to ensure competitive parity.

Millions of jobs are at stake as Pakistan’s industrial sector confronts a looming deindustrialization crisis, driven by the dual challenges of skyrocketing energy costs and the global trend of industrial growth sustainability being severely tested by energy policy decisions. Essential for the country’s economic growth and development, the sector is navigating through turbulent waters, grappling with escalating energy costs that exacerbate the threat of deindustrialization.

The economic backdrop in Pakistan

Over the past decade, Pakistan’s economy has shown alarming signs of distress, with Pakistan’s debt per capita escalating from USD 823 in 2011 to USD 1,122 in 2023, marking a significant increase of approximately 36%. Concurrently, GDP per capita has seen a reduction from USD 1,295 to USD 1,223 during the same period, indicating a 6% decrease. This economic strain underscores the urgency for targeted reforms aimed at revitalizing the industrial sector, which could serve as a catalyst for growth and stability.

Deindustrialisation: a closer look

Deindustrialisation, a process characterized by a decline in the industrial sector’s contribution to the GDP and the employment it generates, poses a significant threat to economic stability and growth. In Pakistan, this trend is exacerbated by rising energy costs, which have become a critical concern for industries, especially in the textile sector. This sector, pivotal to Pakistan’s economy, faces severe challenges due to high energy tariffs, which undermine its competitiveness on the global stage.

Recent statistics from October 2022 to January 2024 highlight the striking impact of rising energy tariffs on industrial energy consumption. Notably, LESCO and MEPCO saw a substantial decrease in electricity usage, with reductions of -73% and -76%, respectively, in January. Such stark declines are indicative of broader industrial contractions and a significant move towards deindustrialisation.

Furthermore, the total load of textile industries on all Discos showcased a -69% decrease, a testament to the acute challenges faced by the industrial sector due to escalating energy costs. This trend not only affects the competitiveness of Pakistani industries but also has profound implications for employment and economic growth.

On the other hand, the recent announcement from the Oil & Gas Regulatory Authority regarding the revision of natural gas sale pricing for the fiscal year 2023-24 also underscores a critical juncture for Pakistan’s industrial sector. The restructured gas tariffs aim to streamline categories and adjust costs, potentially impacting the operational expenses of industries across the board. This decision, while intended to address fiscal imbalances and ensure the equitable distribution of energy resources, places additional pressure on an already strained industrial landscape grappling with high energy costs.

The revision introduces new tariffs for general industry processes and captive usage, signaling a significant shift in the government’s approach to managing industrial energy consumption. Such changes are poised to directly affect the cost structure of various industries, from textiles to manufacturing, at a time when the sector is already facing the challenges of deindustrialization and job losses. The move reflects a broader pattern of energy policy adjustments globally, where nations are reassessing energy tariffs to balance economic growth with sustainability concerns. However, for Pakistan, the delicate balance between fostering industrial growth and managing energy costs becomes even more precarious, highlighting the urgency for strategic planning and support mechanisms to mitigate the adverse effects of these policy decisions on the industrial sector’s competitiveness and employment rates.

A path forward

In the face of deindustrialisation and escalating energy costs, Pakistan stands at a critical juncture requiring a strategic and multifaceted approach to steer its industrial sector towards sustainability and growth. This approach encompasses several key initiatives aimed at creating a conducive environment for industrial development and economic stability.

Streamlining regulatory frameworks

The complexity and bureaucracy of regulatory procedures can significantly hinder business operations, discouraging both domestic and foreign investments. Simplifying these administrative processes is crucial for enhancing Pakistan’s attractiveness as an investment destination. This involves eliminating redundant regulations, digitizing administrative procedures, and establishing a one-stop-shop for business registrations and clearances. By improving the ease of doing business, Pakistan can create a more dynamic and responsive industrial sector capable of adapting to global market demands.

Investing in renewable energy

Pakistan needs to steer its economy toward sustainability by promoting renewable energy, reducing reliance on imported fuels, and addressing price volatility in the international energy market. To this end, industrial units may be incentivized to develop their own renewable energy sources, with on-site projects being allowed an increased solar net-metering cap from 1MW to 5MW. The implementation of the Competitive Trading Bilateral Contracts Market (CTBCM) may facilitate off-site renewable setups, enabling industries to secure green energy at competitive rates through special arrangements like reduced wheeling charges, without the burden of cross subsidies.

The urgency of this transition is amplified by the impending EU’s Carbon Border Adjustment Mechanism (C-BAM), set to be introduced in 2026, which will tax exports based on carbon emissions. Pakistan’s move towards green energy will not be just a response to C-BAM but a strategic imperative to keep its exports competitive alongside regional players like India and Bangladesh, who are rapidly advancing in reducing energy emissions. This shift is vital for Pakistan’s industrial sector to remain viable in the face of stringent global environmental regulations and to participate actively in the international market.

Enhancing export competitiveness

The textile industry, among others with high export potential, is a cornerstone of Pakistan’s economy. Strengthening this sector requires targeted policies that provide incentives for quality enhancement, innovation, and access to new markets. Establishing special economic zones, offering tax breaks for high-value-added products, and facilitating trade agreements can enhance export competitiveness. Additionally, investing in technology and skills development can ensure that Pakistani industries meet international standards and capitalize on global market opportunities.

Learning from global best practices

Numerous countries have successfully navigated the challenges of deindustrialization and high energy costs through innovative policies and strategic investments. Studying these success stories can offer valuable lessons for Pakistan. For instance, Germany’s transition to renewable energy and its focus on high-tech manufacturing, or Bangladesh’s remarkable growth in the textile sector through policy support and market access, provide models that Pakistan can adapt to its context.

Toward a sustainable industrial future

Pakistan’s industrial landscape stands at a crossroads, with deindustrialization looming on one side and the potential for a brighter, more sustainable future on the other. The government’s proposal to lower electricity tariffs to 9 cents is a positive step, but it is only a part of a much-needed broader reform. To truly revitalize the industrial sector and protect it from the global shift toward sustainable development, a multifaceted approach is imperative. This includes simplifying regulatory frameworks, incentivizing the adoption of renewable energy, enhancing export competitiveness, and learning from global best practices. Such reforms are not just about survival; they are about positioning Pakistan one step ahead in industrial innovation and sustainability.

As the world braces for the impact of measures like the EU’s Carbon Border Adjustment Mechanism, Pakistan must act swiftly to transform its industrial sector into a resilient force capable of thriving in an environmentally-conscious global economy. The time for a decisive action is now; the path Pakistan chooses will determine its place in the global industrial narrative and its economic destiny for generations to come.

Copyright Business Recorder, 2024