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Powering Pakistan
THE prime minister wants to bring down the cost of electricity. He should start by repairing the fiscal equation of the state.
There is no harm in talking with power producers to see if coal-fired power plants can be shifted to domestic coal as a way to bring down fuel costs. It is also good to order a move towards smart metering in the distribution companies, something that should have been done many years ago.
But these steps, and others like them, will not amount to much if currency devaluation continues at the pace it has since 2017. The biggest driver behind rising power tariffs is currency devaluation. Pressing on the components of the cost build-up is tinkering on the margins. And the biggest reason why the currency has been under relentless pressure since 2017 is the monetisation of the fiscal deficit.
To put it simply, they’ve been printing money to pay their bills in accelerating quantities, and that money printing has put pressure on the exchange rate because you have more rupees chasing fewer dollars. In order to alleviate this pressure, successive governments have resorted to borrowing from external sources to shore up the availability of foreign exchange, and then used the State Bank’s powers to manage the exchange rate.
This is a losing gambit, because it drives up external debt, piles on debt service obligations, and promotes import-based consumption, because the surplus demand created by the monetisation of the deficit goes primarily into imported products. Pakistan is relying increasingly on imported energy since our gas fields entered their period of decline around 15 years ago. There is no way to shield energy prices from the impact of exchange rate devaluation without creating massive obligations on the state, which will necessarily be met with more printed money, thus further pressuring the exchange rate.
In the years to come, the reliance on imports to meet the country’s energy requirements will only increase.
In the years to come, this reliance on imports to meet the country’s energy requirements will only increase. This is inevitable because no major gas discovery is about to be made, and Thar coal can compensate for the disappearance of domestic gas only up to a point. In due course, industries that rely on domestic gas will need to adjust to a rising cost environment.
Fertiliser, for example, will need to be shifted to LNG for its supply of feedstock at some point. By then, it might become clear that the industry has now completed its lifespan in Pakistan, because imported fertiliser will be much cheaper if feedstock gas prices are brought up to market levels.
A massive adjustment to a permanently high-cost energy environment is coming, whether we like it or now. On the occasion of the country’s 78th Independence Day, it is worth noting that the entire industrial system we have erected since 1947 is built around energy-intensive industries like fertilisers or cement or auto assembly or sugar or textiles. The reason is the ample availability of domestic gas since the first major discoveries in the early 1950s. Now as those gas fields run dry one by one, with Sui and Badin already gone and Qadirpur barely keeping us going, the energy intensity of its industrial system becomes a millstone around the neck of the economy.
This is why disputes are increasingly breaking out among various industrial groups over who should bear the burden of the adjustment to higher energy costs. In the early 2010s, the wrangling between industrial groups over the country’s dwindling gas reserves saw the CNG sector shut down. Now the wrangling has reached textiles and power generation. In due course, it will arrive at the doorstep of the fertiliser industry too.
For home consumers of energy — you and me — the cost of energy is increasingly responding to external sector issues, because increasingly energy is imported. When domestic gas was the mainstay, it could, to some extent, shield energy prices from exchange rate movements. Not so anymore. And exchange rate movements are increasingly being driven by the core fiscal dysfunction of the state.
There was a time when they printed money to boost the economy. Today, they do it to just pay their bills. So long as this continues, the exchange rate will remain under pressure, and no amount of fetching borrowed dollars will help. And as the exchange rate erodes, energy prices will inexorably rise. And this price rise will fuel more wrangling between industry groups, and increase the demand from the electorate for ‘relief’ or for opting out of the grid altogether.
If the government cannot rise above this wrangling and cannot set an agenda for itself beyond searching for ways to provide temporary relief, then this vicious cycle will continue.
It is good that the prime minister is feeling the heat from the common citizenry around energy prices. It is also good that he has not ventured too far into the manufactured controversy around ‘capacity charges’ launched by the textile industry. But as he contemplates the advice of his two task forces, he might want to consider a third input on the future of the country’s energy security and the full spectrum of responses that state and capital should be prepared to give in the years to come.
This means more than just investing in energy conservation technology in manufacturing. Many of our industries are not fit to survive at market pricing of energy, for example, fertiliser. Transitioning out of these industries is imperative. Otherwise, the wrangling over burden sharing and the near-endless search for gimmicks to provide temporary relief will consume the entire bandwidth of the government.
The good news here is that alternatives are now possible. Solar power is making important advances as well as battery storage. Less energy-intensive industries are within reach, if our business elite can bring themselves around to thinking about innovating. But carrying on with this energy-intensive manufacturing base, with low competitiveness, is no longer an option.
The writer is a business and economy journalist.
Published in Dawn, August 15th, 2024
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