The export-oriented sectors of Pakistan have shown marked resilience over the past decades, having weathered the storms of economic uncertainty, severe energy shortages, overvalued currency and delayed refunds. Aided by policy initiatives of the government like providing internationally competitive energy prices, duty-free raw material imports and rationalization of exchange rate, the exporting sector had started to pick up and deliver on enhanced exports, along with fresh investments in manufacturing infrastructure. The government, however, has inexplicably taken a U-turn from the winning formula of regionally competitive energy pricing.
The government's decision of withdrawing zero-rating was already being lamented for soaking up market liquidity, and there is now an additional and very serious issue to contend with: the reversal of the regionally competitive electricity rates for export-oriented sectors.
On 1.1.2019, an all-inclusive tariff of 7.5cents/kWh was fixed for the exporting sectors, in order to ensure international competitiveness and enhance the export base. This created opportunities for the sector to run more effectively, increase its exports and even consider fresh investment in the technological upgradation and expansion of their production units. However, a recent letter issued by the Ministry of Energy on 13th January 2020 detailed instructions to Discos to charge all add-ons to the7.5 cents, thus increasing the overall electricity price from 7.5 to 13 cents/kWh, a 70% increase. Efforts to facilitate exports and enhance economic growth have been rendered null and void by this illogical government decision. Why change a winning formula?
As per the instructions of the Power Division, the bills issued from January 2019 will now be revised to include all add-ons and surcharges. The retrospective imposition of these charges is incomprehensible, as not only does this decision negate the Cabinet/ECC decision but will also impose a large financial cost on transactions already closed i.e. products made, sold and exported based on the 7.5 cents power cost. Furthermore, given the liquidity crunch caused by withdrawal of zero rating and the inoperative refund system, the market simply does not have the liquidity to pay unjustified retrospective bills.
Another aspect that needs to be considered is that according to the latest Nepra determination, Fuel Cost is Rs 3.47/kWh. The export sector tariff of 7.5 cents/kWh is equal to Rs 11.70/kWh. The difference between 11.7 and 3.47 of Rs 8.23 is sufficient to cover all legitimate fixed costs and distribution costs.
The oft repeated mantra by the Ministry of Energy that they are subsidizing the 7.5 cents tariff is debatable, as the cost of supply calculated below depicts. All charges over and above 7.5 cents/kWh are either in the form of inefficiencies, cost of legacies, idle capacity and/or cross subsidisation.
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Description Cost (cents/kWh)
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Fuel Costs as determined by NEPRA 3.4
Distribution Charge 2
Capacity Charge 2
Line Losses 0 (as mills are on 132 KV)
Transmission Charge (1.8%) 0.1
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Total 7.5
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The legacy contracts in the energy sector and inefficiencies of the system have resulted in outrageous levels of tariffs. Some of these are:
1) 2002 Policy Based IPPs with tariffs that yield over 70% returns in dollar terms whereas the policy restricted returns to 15-16%.
2) Wind Power Tariffs of 14-15 cents/kWh as opposed to tariffs of approximately half this amount at the time when these legacy plants were installed which are currently below 4/5 cents/kWh.
3) Coal Power Generation Tariffs, at 9.5 cents/kWh whereas the going rate at the time was less than 6 cents/kWh. The two Port Qasim and Sahiwal power plants will cost the country in excess of $400 million each year in overpayments as a consequence.
4) Solar Power Tariffs of 18 cents/kWh which are currently under 5 cents/kWh.
5) Distribution Losses beyond NEPRA determined losses.
6) Failure of DISCOS to collect the amounts billed.
7) A highly skewed generation mix with excessive dependence on imported fuels.
Inefficiencies of this manner cannot be exported, and neither can the legacy contract costs. The need to reduce the energy price basket is increasingly urgent, as reduced energy rates have proved invaluable in other countries. This has also been proven in Pakistan's case where regionally competitive energy tariffs have resulted in a marked increase in quantity exported.
As energy constitutes 35% of the conversion cost of products, a resulting increase of 24% is estimated in the operating cost of textile sector, rendering the country's products uncompetitive in the international markets. Pakistan's electricity tariffs will be much higher than regional competitors', serving as a blow to the Prime Minister's vision of export-led growth.
Regional electricity prices as highlighted in the table, illustrate that the industrial electricity tariffs of our competitors will be much lower than Pakistan's making us uncompetitive in the increasing market competition. The objectives of economic growth, a bright future and becoming an export "powerhouse" cannot be achieved until power tariffs are revised to a competitive and stable level.
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Country Cents/KWH
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Pakistan 13
China- General 10
China- XinJiang 7.5
Vietnam 8
Bangladesh 9
India 9
India- Punjab 7
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Source: Chinese Expert Group on Industrial Cooperation of CPEC Findings Report for the First Site Investigation on Textile Industry Diagnosis, and regulator websites.
Keeping in view the government's vision to facilitate export-oriented sectors in order to expand manufacturing base, generate employment and earn foreign exchange, the textile sector that comprise around 60% of national exports was developing a roadmap to achieve $50 billion of textile exports by 2030 and increase Pakistan's share in world textile trade form current 1.6% to 3% in next 5 years, with an additional investment of $30 billion in the textile sector in next 10 years.
Efforts are being made to develop a comprehensive textile policy for Pakistan which would ensure that Pakistan's prime export unlocks its maximum potential. However, these efforts are dependent on the assumption that energy pricing would remain regionally competitive. This is critical to the successful outcome of any policy.
A focus on exports can serve as a sustainable solution to the present economic problems. An increase to $50 billion in textile exports by 2030will also create millions of jobs. The textile growth plan has also been presented to the Prime Minister, and has served as the basis for the textile policy currently under development. These targets are achievable given the viable economic environment, and considered to be useful in creating an array of employment opportunities and foreign investments. Irrational policy measures at this stage will result in a reduction of the already minimal contribution of exports in national GDP growth.
World growth trends show that growing at the same rate as the top 25% of emerging markets will require much higher growth in exports. Considering that exporters face the brunt of the pressure from high energy tariffs, Pakistan is now likely to lag behind its regional competitors, with an inevitable reduction in market share.
Governor, State Bank of Pakistan
The impact of uncompetitive prices is likely to shatter market confidence of industrialists, big or small, hinder trade, decrease the ease of doing business, and put a halt to the recent boom in exports for which the competitive energy pricing was largely instrumental.
The order books of the textile sector currently are at full capacity whilst being based on the electricity costing of 7.5 cents/kWh. As a result, there is an urgent need for technological upgradation, modern equipment and investment in new plants to facilitate the additional orders. These developments were possible, and in fact anticipated, considering the benefits that would accrue for Pakistan's exports and Balance of Payments. Textile sector modernization and facilitation can be perceived as the key to unprecedented economic growth for Pakistan.
Pakistan is in need of consistent and progressive policy measures, focusing on enhanced productivity that fosters sustainable export volumes. An export-growth led policy is imperative to real economic growth. But as long as these inconsistent policy measures continue to curtail growth, all our efforts are futile. The government should step back from the retrograde steps and holistically develop a plan to deliver on their promise of jobs, poverty eradication, and sustainable economic growth.
(The views expressed in this article are not necessarily those of the newspaper)