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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

Author Image

Shahid Sattar

PUBLIC SECTOR EXPERIENCE: He has served as Member Energy of the Planning Commission of Pakistan & has also been an advisor at: Ministry of Finance Ministry of Petroleum Ministry of Water & Power

PRIVATE SECTOR EXPERIENCE: He has held senior management positions with various energy sector entities and has worked with the World Bank, USAID and DFID since 1988. Mr. Shahid Sattar joined All Pakistan Textile Mills Association in 2017 and holds the office of Executive Director and Secretary General of APTMA.

He has many international publications and has been regularly writing articles in Pakistani newspapers on the industry and economic issues which can be viewed in Articles & Blogs Section of this website.

Comments

200 characters
KU May 15, 2024 12:58pm
Too much analysis with no pragmatic solutions.
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hooman May 15, 2024 04:46pm
Textile sector is always complaining about something or the other. Fact is exports have gone up in recent months.
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Az_Iz May 15, 2024 05:03pm
The goal of providing electricity to the industrial sector,not just textiles,at competitive prices,is something one can easily agree with.Country cannot expand industrial base with high energy cost.
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Az_Iz May 15, 2024 05:05pm
Not sure,by reducing tarrifs to 9cents will increase demand enough, to even out any losses. But high energy prices for industry is really a major issue, for the country.
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Az_Iz May 15, 2024 05:08pm
End cross subsidies and power thefts.Encourage more industries to shift from gas to electricity.And reduce the cost for industry,which need not shoulder the burden of high costs.
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Az_Iz May 15, 2024 05:10pm
Not sure if the solutions discussed will go far enough. But the goal of cheaper electricity for industry, is a necessity. Very pathetic situation to burden the industry with high energy costs.
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Az_Iz May 15, 2024 05:12pm
Some low income families do need some help with low cost electricity. The government should pick up the costs of cross subsidies.Not anyone else. Definitely not the industry.
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Az_Iz May 15, 2024 05:18pm
Increase petroleum levy to generate another Rs 600 billion & the price of petrol would still be same as India & Bangladesh.Use the money to reduce the high electricity cost mess.Fix T&D losses etc
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Tariq Qurashi May 16, 2024 10:11am
Either ask industry to put in Solar and buy it at reasonable rates through net metering to reduce their bills, or provide reliable grid electricity at half the consumer rate like competitors abroad.
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