As Finance Minister Abdul Hafeez Shaikh met with Prime Minister Yousaf Raza Gilani to brief him about the state of the economy, one subject dominated the conversation: the state of the energy crisis and the government’s failure thus far at successfully dealing with it.
The finance minister had an array of statistics to reassure the prime minister that the economy was turning around. In July, exports were up 27% compared to the same period last year, tax collection was up 36% and remittances from expatriate Pakistanis were up 35%.
Yet the main concern remained the energy crisis, which has crippled the nation’s economy and rendered any recovery effectively impossible without first solving the electricity problem. On that matter, the finance minister was less than reassuring.
Shaikh told Prime Minister Gilani that the special cabinet-level committee on energy – formed by the premier last month – was set to present its recommendations to the full cabinet soon after the end of Ramazan, which coincides with the end of August this year.
The finance minister kept hinting that the solutions would be “out-of-the-box”, but refused to elaborate, leading some observers to conclude that the proposals are likely to be politically unpopular.
Shaikh highlighted six areas where the energy sector needed improvements in order to end the rolling power outages that last for several hours throughout the country.
The areas are: better corporate governance in the power sector where most firms are state-owned, a more reliable and cost-effective mix of fuel sources, forcing all entities to pay their outstanding electricity bills, resolving the inter-corporate circular debt, managing regulatory issues in the energy sector and instituting reforms to ensure that the problem never recurs.
Most of the problems in the energy sector stem from two sources: the inability of power distribution companies, most of them state-owned, to effectively crackdown on power theft. According to estimates by the National Electric Power Regulatory Authority (Nepra), the national grid loses close to 22% of all electricity it produces due to theft and poor infrastructure.
Another key concern has been the government’s inability to pay the subsidies that it promises the energy sector. The government has repeatedly promised international lenders that it will end the practise of subsidising electricity but last year, Islamabad spent close to Rs295 billion subsidising power, choosing to gut the development budget rather than making the politically unpopular decision of raising power rates.
Of the five members on the committee constituted by the prime minister, three favour deregulating the energy sector’s pricing: the finance minister, Petroleum Minister Asim Hussain and Planning Commission Deputy Chairman Nadeemul Haq.
The finance minister also proudly reported to the prime minister that the government did not borrow any money from the State Bank of Pakistan (a euphemism for printing money) during the first month of the fiscal year 2012. The government’s policy of printing money to pay its bills has been blamed by most macroeconomists as the single biggest cause of inflation in the country.
Published in The Express Tribune, August 19th, 2011.
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The government should take concrete measures to introduce merchant market for electricity. Right now NEPRA determines how much profit a power producer/distributor can make. For this it uses long and sometime idiotic measure to estimate the cost of doing business by each company. Now interestingly NEPRA is not effected by the errors in judgement made in the decisions. In a free market, it is customer who decides how much price he is willing to pay for any product. Right now NEPRA insists that power price should be Rs 10 ( for example) which is less than cost to companies, so there is not incentive left for the companies to increase the production which results in loadshedding. Now the consumer is paying heavily either by using HSD engines which costs Rs 26/unit or shuts down his economic activity which results in loss more than Rs 10/kwh but less than rs 26/unit ( the next option available to them) Merchant market for electricity has been successful in so many countries and resulted in surplus capacities in the sector which keeps the a downward pressure on the prices. In essence market forces rather than government should determine the prices