The two points that at least everyone agrees on these days are that there is a major gas crisis in Pakistan and that it will only get worse. Choices have to be made. There are two dimensions to the crisis in that gas rates are ever increasing and the supply is ever decreasing.
The rates issue is mainly due to the fact that domestic and fertiliser consumers get gas at below cost whereas the industry is forced to pay that difference in the form of higher industrial tariff.
Within industry the biggest hit is taken by exporters as they cannot pass on the increased cost to buyers as export prices are dictated by the prices being offered by competitors like India, China and Bangladesh.
In fact, foreign garment buyers have gone so far as to inform Pakistani exporters that in some cases even if the Pakistanis are willing to incur loss by selling their products at the same price as China (where the government is providing massive subsidies and rebates to lower the costs), they would still prefer to place the orders in China as it is easier for them to handle Chinese business as compared to Pakistan due to other problems like adverse travel advisories.
The obvious solution to save the exporters from the repeated gas tariff hikes is for the government to give exporters gas at actual cost instead of forcing them to subsidise the domestic/fertiliser consumers who get gas at below cost.
SNGPL has stated at OGRA hearings that they expect gas to cost them around Rs 200/MMBTU this year so it is alarming that even though the exporters are already getting gas at Rs 240/MMBTU, SNGPL has requested to increase that price by more then 10%.
If the same situation was occurring in other countries like India or China, the respective governments would not hesitate a moment before fixing tariff for the exporters at Rs200/mmbtu or lower and paying the domestic/fertiliser subsidies directly from government sources.
Therefore, it is imperative that the exporting sector is given gas at cost at a special tariff of Rs200/MMBTU which would still be more then twice the tariff fertiliser gets at around Rs 80/MMBTU.
If unlike other countries the Pakistan government does not want to subsidise the exporters, at least the exporters should not be forced to subsidise others. Similarly priority should be given to the exporting industries in gas connections and during the gas load-shedding periods.
As far as the problem of gas shortage is concerned, well, gas reserves are short. Gas will have to be imported. Choices for gas allocation will have to be made.
Whether the government imports gas or is forced to import fertiliser, both have to be paid for in foreign currency. And whereas America can print as many dollars as they want to buy up all the oil and gas they need, Pakistan can only print rupees. So the importance and automatic priority of export industry for gas supply cannot be questioned.
Exports cannot be imported. Fertiliser can. According to fertiliser industry sources, "it is much cheaper to import energy in the form of gas than to import urea". The fact is that all independent experts disagree with that theory.
Firstly, it is much easier to import urea than gas as can be judged by the complications in trying for the Iran gas pipeline. Secondly, as mentioned above, you need dollars whether you import gas or urea and the fertiliser industry is using up the soon to be imported costly gas which could otherwise be converted into exports by the industry to get dollars.
In fact, the government should make a study as to what would happen if the bulk of fertiliser was imported and the gas used elsewhere. Already there are massive subsidies being given to the fertiliser industry and as per World Bank they are reportedly making as much as 100% returns on their investments by not passing on the total subsidy to the farmers.
There is also an element of indirect subsidy which may be more then $1 billion per year as if this gas is freed up and used elsewhere, a massive reduction in costly oil imports will occur which along with increased exports will more than compensate for the fertiliser import bill and in fact may even improve the trade deficit. The equation was different when oil was $30. At $75, everything has to be recalculated.
Both the problems of high gas rates and gas shortage are directly hitting the future of exporting industries and will bring the trade deficit under further pressure. The textile sector makes up more then 60% of exports, almost 50% of manufacturing industry, almost 40% of manufacturing employment and almost 10% of GDP.
The textile industry has already started to get negative messages from the government signalling that GoP thinks that in fact they have over-emphasised the importance of textiles to Pakistan economy. Consider this.
If China with foreign reserves of $875 billion thinks that textiles are important enough to risk good relations with America maybe we should also think twice before writing them off.
The total international trade in textiles is currently about $300 billion out of which Pakistan's share is less then 3%. By the year 2014 this international volume is expected to increase to $800 billion. If Pakistan even just maintains its measly current share that means textile exports will increase by almost 3 times and if Pakistan can just double its share the textile exports will increase 6 times to almost $50 billion.
The trade deficit will disappear. Sadly, even if the Pakistan government cannot understand these simple figures, the Indian government can and is showering its textile industry with every form of rebate and subsidy it can think of. Remember, neither country can print dollars.
One just has to drive from Thokar Niaz Beg down the Multan road and count the number of closed garment factories to realise what direction Pakistan has started moving in. Remember, as per SMEDA it only takes Rs 50,000 to create 2 good quality jobs in the garment industry versus much higher investment in other sectors.
Unfortunately textiles is a bulk volume low margin industry which requires very high short-term and long-term bank borrowings and is, therefore, very sensitive to interest rate and energy price increases. In fact even last years biggest fortune 500 company Wal-Mart stores with annual revenues of over $300 billion had profits of only around 3% of total sales.
If you look at the histories of the developed world and especially the Asian tigers, they all started off big in textiles and eventually closed this industry when their costs increased and they were no longer feasible.
The tragedy with Pakistan is that just when our textiles were poised to take off after removal of quotas in 2005, our costs immediately increased, mainly due to increase in gas tariff and interest rates.
Our exports have become uncompetitive and we have not gotten a period like Bangladesh is currently enjoying where we could have used our cost effectiveness to gain substantial export share. The Indian government gives their textile industry interest rate rebate of 5% and gas in Bangladesh is 60% cheaper than Pakistan.
In order to increase exports by 6 times as mentioned above, we need six times the spinning, six times the weaving and six times the garment factories. That translates into billions of dollars of investment, millions of jobs and a tremendous increase in government revenue.
However the industry has already been knocked out by the current unfeasibility of the $5 billion investments it has made in the past few years and further investments have stopped.
Given the limited options that Pakistan has, which other sector has even a remote chance of exports of $50 billion? A bird in hand is worth two in the bush. Well there does not seem to be even a bush in the near future, let alone two birds. Let's start by giving the exporters gas at a fair price.
Trade deficit is looking like crossing $12 billion this year which can increase much more next year due to the reported water shortage and the trouble the textile industry is in.
In fact, give gas at Rs 80/MMBTU to the textile sector for a 10-year fixed period like the fertiliser industry and the government can go on vacation and just sit back and see Pakistan take over the world's textile industry and become an economic power house.
Textiles use less then 10% of the total gas in Pakistan so the cost would be nothing compared to the possible benefits. If not, well at least let's start with a fixed rate of Rs 200/MMBTU tariff for the exporters and let them show a sample of what they can do.
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