The incoming PTI government’s honeymoon period will be short-lived, with issues at finance and energy ministries coming into full view. The immediate need is to cut down twin deficit. The current account deficit at $18 billion (5.8% of GDP) and fiscal deficit at Rs2.4 trillion (7percent of GDP) are required to be reduced significantly to put economy on a sustainable path.
It is imperative to curtail the twin deficit by taking tough austerity measures. The currency has been adjusted by 15-20 percent in the past six months and it may need a further jerk in months to come if the financing gap is not filled. Lately, the currency is moving in line with market forces; the healthy volatility is better than managed float. However, the direction is downward as long as the external hole is not filled.
The tightening of monetary policy should continue to check demand and inflation. The development spending is required to be put under a check. Say no to any new infrastructure for the time being and focus on spending on education, health and environment. In a nutshell, the growth momentum has to be compromised in the quest to attain sustainability.
The key strategy should be to bring efficiencies in the energy chain to slash import bill, lower the circular-debt buildup and cut PSEs’ leakages to curb fiscal deficit, and to lower the overall cost of energy to bring competitiveness in the economy. The second leg is to reverse the trade balance in agriculture. An agrarian economy is a net importer; the equation is required to be changed.
Pakistan’s total energy and food/agriculture imports are estimated at $24 billion in FY18, which is 40 percent of total imports and 130 percent of current account deficit. Imported energy accounts for 45 percent of country’s prime energy supply and 40 percent of primary energy is consumed in power generation.
The country has massive indigenous energy potential, which has the potential to substitute imported energy in medium to long term. The solo focus on new generation ought to be on Thar coal, renewable energy (hydro, wind, solar and biomass) and on exploration of oil and gas exploration including shale and tight gas.
The energy capacity expansion is alarming and it is on take or pay basis. Government has to pay for every megawatt of capacity addition irrespective of demand. According to NEPRA’s latest report, the net capacity addition stood at 7,775MW in 2018 and total capacity addition planned till 204-25 is 35,999MW, which will take total installed capacity to 62,185MW.
The growth is going to slow down in FY19 and FY20 in the quest to cut down twin deficit. Thus, do not expect energy demand to grow much. According to NEPRA, the demand is assumed to grow by 4.5 percent and the energy will remain surplus every year, peaking at 13,934MW in 2024-25. These numbers are scary as the capacity payment has to be made and that will invariably increase the energy prices.
The point is that the PTI energy team has to be very careful with any power-generation addition and there should be only take and pay policy. The focus should be on energy conservation. There is undocumented captive-power generation across the country running on gas. The captive generation is inefficient but domestic gas prices in Khyber Pakhtunkhwa and Sindh are too low for industries to not opt for grid electricity.
The gas prices ought to be revised upwards to incentivize captive consumers to move to the grid. And within the national grid, only most efficient new plants should be running on imported fuel while the inefficient plants are required to close or retire. The use of solar energy should be promoted to replace captive generation on fossil fuel across the country, while in agriculture land biomass is required to scale up.
Thus, bringing energy efficiency in both generation and consumption can help in reducing the oil import bill. On T&D losses, the need is have competent technical teams to check the problems across the grid and invest in cable, transformers and other infrastructure where it is required, and improve governance where theft is high.
In order to straighten the energy sector, the need is to merge the two regulators (Ogra and Nepra) into one. When the country has one energy ministry, there is no rationale for two regulators. The Disco’s are required to be privatized or at least de-regularized to take the brunt of their losses.
Apart from energy, agriculture is the hidden jewel. The country’s agriculture import bill is estimated at $7.5 billion in FY18 – including $2 billion palm oil and $1 billion cotton. The misplaced pricing policies and political interests have resulted in wheat and sugarcane surplus crops.
The country’s annual sugar production at 6.3 million is almost twice of domestic demand. The surplus water-intensive crop, then, has to be exported at massive subsidies. Similarly, wheat support price is close to double the international prices, resulting in wheat exports also requiring subsidies.
The need is to change pricing in a way to incentivize cotton production over sugarcane to enhance value-added exports and reduce raw cotton imports. The palm oil can be produced on the coastal highway or in Sindh; it should be encouraged to substitute imports.
These are some basic suggestions on energy and agriculture fronts to lower the deficits. There are other many elements required for improvement – such as fiscal federalism, expenditure control, revisiting FTA with China, JVs in CPEC, role of CCI and the Planning Commission, judicial reforms, tax reforms, human development, and housing-led employment generation to name a few. These will be covered in subsequent columns.
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