Time to act: 9 cents/kWh

The country faces daunting economic challenges. A shrinking industrial base, a bulging workforce with no jobs to turn to, twin deficits resulting in unsustainable debt and debt servicing, and a structural imbalance between production and consumption that is the cause of repeated episodes of sharp devaluation and high inflation.

Pakistan’s industrial base has been shrinking since mid FY23, largely on account of high interest rates — a measure to bring down record-breaking inflation — and out of control energy costs.

Power tariffs for industrial consumers are around 15.4 cents/kWh at present, down slightly from a record-breaking 17.5 cents/kWh in January 2024. Cross subsidies and stranded costs embedded in the power tariffs make them over twice the average faced by regional economies like India (6 cents/kWh for textile producing regions), Bangladesh (8.6 cents/kWh) and Vietnam (7.2 cents/kWh).

Such high input cost differentials render our products uncompetitive in international markets. Resultantly, Pakistan’s textile exports—which account for over half of total exports—have been clocking in at only around dollar 1.4bn per month, which is 30 percentage below the installed capacity of dollar 2bn per month, while our competitors like Bangladesh and Vietnam have been exporting 3 to 5 times as much.

Moreover, around 60 percent of basic industry, including yarn and cloth manufacturing that are relatively energy-intensive processes, have shut down due to prohibitive energy costs. This has prompted a sharp increase in imports of the same as exporters can import duty-free inputs for exports through EFS, resulting in a decline in the domestic value addition in exports and deterioration of the trade balance.

The economy is deindustrialising at an unprecedented pace.

Yet, ironic as it is, the shortage of industrial capacity is perhaps the economy’s most pressing structural fault. Pakistan faces a permanent supply-side constraint, given that we do not produce enough to meet domestic consumption requirements. Every time the economy experiences even marginal levels of growth, there is a natural rise in aggregate demand.

However, Pakistan’s domestic production capacity is neither sufficient to meet domestic demand nor can it generate sufficient foreign exchange to meet our import requirements. The shortage of foreign exchange resulting from an increase in aggregate demand then leads to episodes of sharp devaluation and high inflation that have become seemingly permanent features of Pakistan’s economy.

The only sustainable way out of this trap is to increase the country’s productive manufacturing capacity so that it can meet domestic requirements and produce exportable surpluses to earn sufficient foreign exchange the country’s import requirements. However, competitive manufacturing requires competitively priced energy, and the energy currently available in Pakistan is anything but competitively prices.

As already discussed above, power tariffs for industrial consumers are over twice the regional average while gas prices have also increased by 223 percentage since January 2023, leaving no financially viable source of energy for manufacturing activities. If the economy is to revive existing manufacturing and attract investment towards more, industrial consumers cannot be made to pay for cross subsidies to non-productive sectors of the economy.

Power tariffs for industrial consumers must be reduced to 9 cents/kWh immediately. Energy consumption is highly sensitive to prices and, using actual power consumption data of APTMA (All Pakistan Textile Mills Association) members, we estimate that a 1 percent reduction in power tariffs can increase demand by 3.12 percent.

Moreover, an additional 1 percent discount on the price of grid electricity relative to the cost of alternate sources of energy further increases electricity demand by 1.85 percent. Based on this, a reduction in power tariffs to 9 cents/kWh can stimulate sufficient additional power consumption and economic activity to compensate for the revenue impact of removing the cross subsidy and generate an additional Rs 73 billion over that in government revenues from just APTMA members.

Moreover, the additional power consumption from textile and other sectors will make use of currently idle over-capacity, addressing the issue of capacity costs and reducing their burden on other consumers.

It is crucial, however, to underscore the urgency of this issue. If power tariffs are not promptly rationalized, the consequences will be irreversible. The deindustrialization could become entrenched as the cost of re-entering production—reacquiring machinery, rehiring and retraining staff—proves prohibitively expensive for most firms and business owners.

Once industrial units shutter and skilled workers disperse, reigniting the engines of production is not merely a matter of flipping a switch. The economic machinery, once dismantled, requires significant capital and effort to restore, and the window for revival is narrowing with every passing day.

In conclusion, this is a call to action to rescue Pakistan’s economy from the precipice of economic calamity.

Reducing power tariffs to 9 cents/kWh is an essential step that can catalyse a resurgence in manufacturing and exports, pivotal for economic stability and growth. So let this be remembered as the moment when Pakistan chose renewal over decline, when we fortified our industrial base rather than pushing its disintegration.

We urge policymakers to act with the resolve this crisis demands — to implement these critical reforms and secure a prosperous future for all Pakistanis. Time is of the essence, and the decisions we make today will determine the future for generations to come. Let us choose a path of growth and resilience.

Copyright Business Recorder, 2024