ADB’s revelation of the decade

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The Asian Development Bank (ADB) has said that Pakistan’s economy faces a major hurdle in the shape of its persistent domestic energy crisis, as the load-shedding intensifies losses arising from power and gas shortages held down GDP growth by 3 to 4 percentage points in FY2011 and FY2012.
The bank’s flagship annual economic publication, Asian Development Outlook 2012 released on Wednesday says identifies rising inflation, decline in investment, low tax revenue and losses at public-sector enterprises as other factors hindering economic growth. Beyond the immediate fiscal and energy improvement steps, the country needs clear business plans to boost the economy, in particular manufacturing and infrastructure development, to sustain growth and generate jobs.
The economy continues to be affected by structural problems, including a domestic energy crisis, a precipitous decline in investment, persistently high inflation, and security issues. Budget deficits remain high, driven by substantial subsidies and losses at state-owned enterprises, and tax revenue below target, says the report.
The ADB sees power as the main constraint for economic growth, stressing for better load-management to minimize commercial losses. The country’s Planning Commission estimates that losses arising from power and gas shortages held down GDP growth by 3 to 4 percentage points in FY2011 and FY2012. Improved management of power resources could ameliorate predictability of load-shedding to allow the private sector to better schedule work and minimize costs.
For every unit of power sold, there is a loss to the sector reflected in the form of subsidies. An outstanding accumulation of Rs 220 billion was carried into FY2012, and an additional financing of 1 to1.5 percent of GDP is likely to be required in FY2012. The report advises reforms in not only the energy sector but also state-owned enterprises, naming Pakistan Railways, Pakistan International Airlines (PIA), and Pakistan Steel Mills as entities suffering the steepest of losses.
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,” advises the bank. The slow growth in recent years was exacerbated by widespread floods in FY2011. Unless progress can be made in resolving these fundamental problems, the growth outlook will stay modest.
The report says Pakistan’s economic outlook is expected to stay modest as its growth during fiscal year 2012 would hover around 3.6 percent. It says Federal Board of Revenue (FBR) collections are much improved, running a full 33 percent 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 meeting the overall revenue target for FY2012 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 external accounts returns to deficit, with scant cushion from the financial and capital accounts. Lower prices for key export commodities, particularly cotton, combined with higher import prices, pushed the current account from near balance for the first 7 months of FY2011 to a deficit of to a deficit of $26 billion (1.8 percent of GDP) by end-January 2012. Workers’ remittances expanded by 23.4 percent during July 2011- February 2012, slightly slower than the pace for the same period a year earlier. However, the economy will remain exposed to balance of payment pressure in the current international environment and subdued growth in other Asian countries, says the report.
MULTIYEAR POWER CRISIS PLAN : Noting with concern that the persistent power crisis in Pakistan is a major constraint for economic growth, the Asian Development Bank (ADB) has suggested implementing a multiyear plan with solid support from stakeholders and consumers for a sustainable and reliable power sector in the country.
The banks Asian Development Outlook report says power is the main constraint for economic growth, as load-shedding intensifies and becomes less predictable. The power shortage is the main factor constraining economic growth. The supply-demand gap at peak hours reached over 5,000 megawatts (MW) in FY2011. This reduced economic output, hitting manufacturing the hardest. 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 2 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 Rs 220 billion was carried into FY2012, and an additional financing of 1 to1.5 percent of GDP is likely to be required in FY2012.
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 of 1,264 MW and a nuclear power plant of 340 MW.
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. Plans to increase domestic gas production, import liquefied natural gas, pipe gas from neighboring countries, or bring in electricity from Central Asia have yet to materialize.
Financial issues are rooted in the fact that the cost recovery tariff determined by the National Electric Power Regulatory Authority is not applied to customers. Thus the government bears the differential as a subsidy. Losses and costs excluded from the tariff formula also accumulate at the public sector company level. 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 oil-based 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 percent. However, these efforts have been overshadowed by the increase in costs and unwillingness of some customers to pay the higher tariffs.