By Ishfaq Ahmed
The Pakistani GDP growth, fiscal deficit and inflation targets have been irrelevant due to energy shortage, over public expenditures and food inflation, The Asian Development Bank (ADB) indicated.
The ADB released Asian Development Outlook 2012 on Wednesday and said that the energy outages and damage to the cotton crop from floods for the second consecutive year in early current fiscal years. The ADB expected that the Pakistani economy to hold fiscal year growth to 3.6 percent while Pakistan had set target 4.5 percent growth in the current budget.
"The power is the main constraint for economic growth, as load-shedding intensifies and becomes less predictable. Improved management of power resources could ameliorate predictability of load-shedding to allow the private sector to better schedule work and minimize costs", ADB said in report.
The power shortage is the main factor constraining economic growth. This reduced economic output, hitting manufacturing the hardest. The cause of the power sector crisis can be divided into three pillars: cost-efficient generation capacity not keeping up with demand, financial issues, and management issues.
The supply–demand gap has widened because of a lack of investment in energy. The government has in fact added 1,604 MW to the system by commissioning six new independent power producers 1,264 MW and a nuclear power plant (340 MW). A 49.5 MW wind power plant has recently obtained financing.
However, other domestic resources (hydro, gas, and coal) have not grown enough to cover demand, thereby increasing reliance on imported fuel oil. The energy mix has changed from predominantly hydro to thermal, which consists of domestic gas and imported fuel oil.
Industrial, retail, and fertilizer users are competing for the depleting gas supply, the preferred fuel for existing thermal plants. The lack of financing leads to arrears for the power generation and fuel companies. Timely payment to these companies, essential for the sector’s reliability, has become increasingly difficult, partly because of increased dependence on imported fuel, which is subject to wide price fluctuations. The cost of power generation in the country escalated by almost 40 percent in the 2 fiscal years ending FY2011. Despite steep increases in tariff and fuel price adjustments, customer tariffs remain below cost recovery, requiring large government subsidies to keep the system operating.
The focus on massively increasing spending on power subsidies, reforms, and efficiency measures has been unable to remedy the accumulation of arrears in the system. To improve management, the government has appointed independent boards for the public power companies to select chief executive officers for these companies. Efforts are also ongoing to decrease commercial and technical losses (around 20%). However, these efforts have been overshadowed by the increase in costs and unwillingness of some customers to pay the higher tariffs.
For a sustainable and reliable power sector, a multiyear plan with solid support from customers and other stakeholders needs to be implemented, the ADB suggested.
The current system, with tariff and collections below cost recovery, is a major deterrent to investment for capacity expansion in the sector. Cost recovery has not yet been achieved despite substantial increases in tariffs over the past two years, and measures to bring down costs have not been effective. For every unit of power sold, there is a loss to the sector reflected in the form of subsidies or accumulation of losses in the state owned power companies. An outstanding accumulation of PRs220 billion was carried into FY2012, and an additional financing of 1 to 1.5 percent of GDP is likely to be required in FY2012. Implementation of many of the actions taken by the government has been complicated by legal challenges, ADB said.
The impact of substantial gas and power load-shedding from December 2011 and continuing into FY2012 is holding down both manufacturing output and export performance.
Moreover, textile manufacturers report substantial reductions in orders this year, as unpredictable energy outages prevented many of them from meeting their production commitments last year. Manufacturers’ associations have expressed concerns that energy outages will nullify any potential gains from European Union tariff waiver concessions.
The inflation (year on year) picked up to 11 percent in February 2012. Core inflation remains near double digits, pointing to continued persistence of inflationary pressures. Increases in energy prices in March 2012 and further expected adjustments will keep upward pressure on prices. For FY2012 as a whole, average inflation is projected at 12 percent. On assumptions of a strengthened budget performance and broad stability in oil and other global
commodity prices, inflation could ease to 10.0% in FY2013.
"Fiscal developments for FY12 present a mixed picture. Federal Board of Revenue collections are much improved, running a full 33% ahead of last year’s performance for the first 6 months. This reflects improved economic activity in the first half of the year, as well as extension of the flood-related tax surcharges and improvements to tax administration. Yet it is unclear that the overall revenue target for FY2012 will be achieved, as this in part depends on the sale of third generation telecoms licenses in the latter part FY2012 a sale already rescheduled over the past 2 years ", the report said..
"Despite the implementation of an automated pass-through of input price increases to electricity tariffs, the overrun on energy subsidies is expected to be more than triple the amount budgeted, at slightly above 2 percent of GDP, as key energy-efficiency measures have been delayed and state-owned enterprises continue to absorb the losses. Taken together, uncertainties over non-tax revenue and higher than targeted current expenditure point to a budget deficit in excess of the 4.7% of GDP target" the report said.
The state-owned enterprises represent a heavy drain on fiscal resources. Pakistan Railways, Pakistan International Airlines, and Pakistan Steel Mills have incurred steep losses for the past several years. The challenge of improving efficiency and putting these enterprises on a viable commercial footing is formidable. Reforms are needed, including a separation of these enterprises from operational interference by government ministries.
The external accounts are increasingly fragile, as the current account returns to deficit, with scant cushion from the financial and capital accounts.
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