Pakistan’s implicit energy policy is increasingly becoming anti-manufacturing. The policy of full cost recovery pushed by the IMF is clearly not working. And the way energy prices are tweaked to force consumers to move towards the grid is a recipe for disaster.
The government claims that the policy is forced upon by the IMF. If that were true, either Fund lacks comprehension or seeks to see an end of manufacturing in Pakistan.
To entice industrial consumers to move to the grid, prohibited levies are being imposed on gas use in the captive power generation, making it unviable. However, not many consumers have shifted towards the grid. Instead, they have opted for alternates. They have imported new machinery and solar panels.These imports also add strain on the external account. Moreover, it uses up capital expenditure, leaving less cash available for business expansion.
Some moved to Furnace Oil (FO) based captive generation. However, in order to secure first tranche of $200 million under RSF from the IMF, the finance ministry has applied ridiculously high levy on FO without taking into account the implication on manufacturing and overall petroleum industry.
It is shortsightedness (or lack of comprehension) of the finance ministry. FO is a byproduct of our dated refineries, while producers have been searching for buyers. Finally, they found some. But the government is now killing the last source of demand too. Now there is a problem of using FO which is resulting in lower throughput of refineries; this in turn places additional pressure on imports of refined petroleum products while local crude usage is falling.
In the gas sector, the best paying consumer (captive) has moved away due to pricing and now gas circular debt is growing. It has become increasingly challenging to use expensive but imported RLNG. That is resulting in reduction in local production which is cheaper; and forcing the gas price to further increase for full cost recovery which in turn shall sway more consumers away.
Now the government has cancelled 21 cargos from ENI for the next two years and the latter may sell it on spot and any difference in pricing shall be borne by Government of Pakistan which shall eventually be passed on to the existing thinning gas consumers in the name of full cost of recovery. A similar deal is in the pipeline with Qatar.
The energy sector remains in a complete mess. Policies are being made in silos without giving any heed to the impact on other sectors and overall economy. Power and finance ministries which are already in a mess are attempting to turn petroleum ministry unviable too.
Power sector demand is required to be picked. That can only happen by fair pricing and ensuring availability. The government needs to rethink unified energy pricing: especially in the power sector. The recently announced scheme to provide incremental power consumption at so-called marginal rate is also likely to fail.
The key is to bifurcate regions and provide power production in south at its marginal cost to South consumers. There is trapped power in South and it is best to provide incentive there to use it. However, someclaim that this would be a political disaster and can lead to political chaos. India and US having so many federating units have similar policies without any politicalissues. Why can the same not take place in Pakistan?
The real issue is that it may increase prices in Punjab and Punjab dominated politicians, bureaucracy and establishment refuse to accept this.
The country cannot run on these archaic policies. When commodities and perishable food items are priced lower near place of origin/product, why can the same not be true for electricity?
The government must think holistically before it is too late.
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