Pakistan's economy struggles as power crisis continues

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As fuel shortages have become a chronic problem in Pakistan, the overburdened electrical system collapses very often, just as it happened on January 23 resulting in a rolling wave of blackouts that began in Balochistan and Sindh provinces, but quickly spread to nearly the entire country, including the densely-crowded cities of Karachi, Lahore and Rawalpindi.

Although power is being gradually restored, the question of overcoming frequent blackouts and load-sheddings in future still remains begging for solution.

The crisis forced the government earlier this month to order shopping malls and markets to close by 8.30 p.m. for energy conservation purposes.

The sorry state of the country's power sector is emblematic of its ailing economy. The economy is struggling for post Covid-19 economic recovery, but it is increasingly finding it difficult due to power outages and costly power impinging on both domestic industrial output and competitiveness in the export markets.

The power cuts left millions of people without electricity during the January 23 outage, the second such outage in nearly four months.

The power outages in Pakistan occur frequently due to the lack of funds to upgrade its aging infrastructure. At a time when Pakistan is grappling with one of the country's worst economic crises in recent years amid dwindling foreign exchange reserves, if it does not overcome power crisis, it would further worsen its industrial output and day-to-day living of the households.

Prime Minister Shehbaz Sharif is facing a very unpleasant situation, as he is trying to create a good image of the government before the parliamentary elections take place.

He tweeted apologetically, "I would like to express my sincere regrets for the inconvenience our citizens suffered due to power outage yesterday. On my orders, an inquiry is underway to determine reasons of the power failure. Responsibility will be fixed."

This is the usual refrain of the Pak regime every time power breakdowns happen, but things have not improved.

Rather than taking concrete steps to find the root causes of frequent power outages and working on them for improvement, a blame game starts from top to bottom in Pakistan. The ruling dispensation blames it on the former regime while utility officials blame one another for failing to anticipate the cascading blackouts or for delaying repairs to the electric power system.

For the reason of elections in near future, the Pakistan government has been reluctant to take harsh measures for carrying out much-needed reforms in the power sector. The fire-fighting measures like direction by Sharif government to all government departments to reduce electricity consumption by 30 per cent and instructions to private businesses and restaurants to close early at night could at best help withstand the power crisis for a short while.

A long-lasting solution to power outages could be found only by addressing the complex, structural and financial issues pertaining to the power sector of the country.

According to the Pakistan Economic Survey 2021-22, the installed electricity generation capacity reached 41,557 MW in 2022 as against the maximum total demand from residential and industrial estates at nearly 31,000 MW, but the transmission and distribution of power fell far short than peak demand and stood at 22,000 MW, leaving a power deficit of about 9,000 MW.

The transmission and distribution system needs new investment to cover the demand-supply gaps and cope with rising demand due to increasing population and economic activities.

The present economic situation does not permit Pakistan to invest in power infrastructure. Earlier, Islamabad used to blame natural disasters like earthquake and floods as responsible for breakdown of power transmission and distribution infrastructure to pacify people's anger and frustration, but given the livelihood and business implications, the pretext is not taken well now by the people.

The country would find it very difficult to invest in power transmission and distribution infrastructure due to resource crunch. Global credit ratings agency S&P Global (NYSE:SPGI) cut Pakistan's long-term sovereign credit rating in December 2022 by one notch to 'CCC+' from 'B', reflecting a continued weakening of the country's external fiscal and metrics. This would further deteriorate the prospects of attracting foreign investment and even aid and assistance.

As reported, investments in Pakistan through China's Belt and Road Initiative (BRI) dropped by 56 per cent in the first half of 2022. The Fudan University attributed this to the changing nature of the BRI as it adapts to a combination of strained global economy, debt crisis in some BRI countries and changing position of China in the world that makes it more risk averse.

In the first four months of the current fiscal, foreign investment in Pakistan plunged by 52 per cent. This makes investment in infrastructure unthinkable.

Given the precarious fiscal situation, investment in power infrastructure by Pakistan government does not appear to be a near possibility.

According to a report published in Dawn, the Federal Board of Revenue (FBR) missed its collection target for December by almost 24 per cent. The provisional collection stood at PKR 740 billion in December 2022 as against the target of PKR 965 billion.

As part of non-tax revenue, the government is expected to collect at the import stage an amount of PKR 60 billion under flood levy in the second half of 2022-23, but this would not be adequate to cover either the fiscal deficit or investment requirements for power transmission and distribution infrastructure.

Already, the fiscal deficit of the country is under IMF pressure to cut it so as to avail its bailout support. Rather than meeting the conditionality, Islamabad requested the IMF for an increase in the budget deficit for 2022-23 fiscal year by allowing an adjuster of PKR 340 billion. Now the adjuster will be used to hike the budget deficit target envisaged at 4.9 per cent of GDP.

Pakistan is witnessing acute shortage of foreign exchange and it is also crippling its capacity to invest. Pakistan's foreign exchange reserves have declined to a four-year low of $5.576 billion during the week ended December 2022 as against $16.6 billion in January 2022, marking a fall of $11 billion in just 10 months. The foreign exchange reserves of the country are barely sufficient for three months of import. The problem is further accentuated by the fact that Islamabad has to pay $33 billion debts by FY 2023 of which Pakistan claimed it has so far arranged only $20 billion.

The IMF support to the country is also facing a stalemate. The next tranche of $7 billion Extended Fund Facility of the IMF to Pakistan is also uncertain due to delay in the review. Differences still persist over tax collection targets, and energy reforms, including hiking of gas tariffs, rising circular debt, and expenditure over-run, among others.

In a major blow to cash-strapped Pakistan, the World Bank has reportedly delayed the approval of two loans worth $1.1 billion until the next fiscal year. It has also opposed slapping a flood levy on imports, creating a new hole in an already ambitious $32 billion annual financing plan. The Bank's decision to withhold approval of the second Resilient Institutions for Sustainable Economy (RISE-II) loan worth $450 million and the second Programme for Affordable Energy (PACE-II) worth $600 million will be a major jolt for the government.

Now the only hope for Pakistan is the $9 billion that it mobilised in the UN and Pakistan conference for building climatic resilience at Geneva in January 2023. But the conditions of using these funds is that they are used only for the stated flood related reconstruction and rebuilding.

Another reason for hope for Pakistan is a vibe from the United States for assistance to sail through the serious power crisis. According to a top official in the Biden administration, the US is ready to assist Pakistan in resolving its electricity woes as the country fell into a nationwide power breakdown due to a "frequency variation" in the national grid.

US State Department spokesperson Ned Price told reporters at his daily news conference on Monday, "We're prepared to do so in this case, if there is something that we're able to provide. But I'm not aware of any particular request yet."

He added, "This (Pakistan's financial crisis) is a challenge that we are attuned to. I know that Pakistan has been working with the IMF, with international financial institutions. We want to see Pakistan in an economically sustainable position. We are supportive of our Pakistani partners, but ultimately these are conversations between Pakistan and international financial institutions."

Cash-strapped Pakistan revived a stalled $6 billion IMF programme last year which was initially agreed upon in 2019 but it is finding it hard to meet the tough conditions of the Washington-based global lender which has increased the package by $1 billion.

There are reports that the IMF may not release more funds under the programme until the pledges made by the government are met. The IMF board in August approved the seventh and eighth reviews of Pakistan's bailout programme, allowing for a release of over $1.1 billion.

Pakistan power sector desperately needs reforms and investment. But there is no immediate clue as to how it can proceed to resolve its financial problems and initiate power sector reforms due to lack of political stability and resource crunch. Meanwhile both businesses and people are suffering and the economy is bleeding.

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