EDITORIAL: Pakistan’s economy direly needs investment in productive sectors in general and exports in particular to break itself free from the cycle of balance of payment crises. To achieve this, the country needs savings within the formal sector, making fiscal austerity imperative.
On the fiscal side, taxation rates must be lowered, and the tax net broadened to incentivize capital formation in productive manufacturing sectors.
However, even with these fundamental measures there are other imperative factors that cannot be ignored at all.
One key area is the reliable availability of energy at affordable rates. The lack of it remained a major bottleneck in the past. Currently, however, the energy availability is sufficient, given the installed power capacity and long-term contracts to purchase energy.
However, due to exorbitant rates and gaps in grid supply reliability, demand has significantly decreased. Consumers have shifted to alternate energy sources, with solar power generation leading the way. As a result of which, capacity utilization has dropped to 45% during peak months and only 25% in off-peak months.
The government is eager to enhance capacity utilization to dilute fixed capacity payments. To achieve this, overall electricity consumption must increase by incentivizing consumers who rely on alternative energy sources to switch to grid electricity. The government is attempting to do so by making alternative sources more expensive.
One such move is the punitive increase in gas rates for industrial captive users. Two years ago, the rate in the South was Rs1200/mmbtu; today, the effective price exceeds Rs4200/mmbtu. At this rate, even the most efficient combined-cycle gas users have become unviable; they are, therefore, considering alternate options.
However, initial discussions with industry players in both the South and North indicate that almost all major exporters are unwilling to transition to the grid due to high costs and frequent power outages. The DISCO grid has serious reliability issues, with power tripping once or twice a day being common. In industries such as textiles, power interruptions result in wasted cloth during dyeing and finishing, sometimes requiring entire batches to be discarded: a cost no business can afford. For other industries, frequent outages accelerate general wear and tear on equipment.
Therefore, industries in the North are exploring alternate energy sources such as solar, biomass, bagasse, coal, and furnace oil. While the KE network in the South is relatively reliable, the upfront grid costs and tariffs remain prohibitively high. The government is likely to impose taxes on alternate energy options, including furnace oil, in an attempt to push industries towards grid electricity.
To make this transition feasible, both reliability and cost must be addressed. The Prime Minister has promised to reduce the power tariff by Rs8 per unit. However, this figure seems to be based on presupposition that moving gas from captive users to the grid will lower costs. In reality, reliance on RLNG (which must be imported) will increase, while domestic gas production will be curtailed due to lack of storage and demand.
Nonetheless, the government may manage to reduce tariffs to some extent. One approach is increasing the petroleum levy and using the additional revenue to lower electricity tariffs. Additionally, falling commodity prices and lower global and local interest rates are helping reduce Fuel Cost Adjustments (FCAs) and Quarterly Tariff Adjustments (QTAs), making grid electricity more attractive for captive users.
However, these efforts may not be sufficient to attract new industrial investments. They may also fall short in encouraging Chinese industries to relocate or supporting the emergence of non-traditional sectors. Other costs, such as land acquisition, also pose significant challenges. In many industrial estates, investors buy land primarily for real estate gains rather than for industrial use. This practice needs to be regulated by implementing smart policies that decouple industrial estates from speculative real estate investments.
Another major challenge is taxation. At current tax rates, capital formation is not viable in Pakistan. Many investors are moving their funds to jurisdictions with lower tax rates. Rationalizing tax rates is critical to attracting investment.
In conclusion, while energy costs and reliability are crucial, many other competitive factors must also be addressed to create anattractive environment for investment in productive sectors.
Copyright Business Recorder, 2025
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