By Shahid Sattar | Muhammad Mubasal

Energy is pivotal for growth, yet Pakistan’s situation is grim. Despite possessing abundant resources, its energy landscape is plagued by inefficiencies and distorted consumption pattern. This complex issue is multifaceted that intertwines to shape the current energy paradox.

The energy to GDP conversion rate serves as a key metric to gauge an economy’s energy efficiency and measure how effectively a country uses energy to generate output and income. A higher rate in this regard means the country is more efficient at converting energy into economic output.

To put things into perspective, Bangladesh’s conversion rate of $6.13 million/ktoe is twice that of Pakistan’s, which stood at $3.3 million/ktoe. This significant difference underscores Bangladesh’s superior energy efficiency and effective allocation of resources, setting a regional benchmark.

Interestingly, a key factor in Bangladesh’s higher efficiency is the declining energy demand within its industrial sector. This trend indicates greater energy efficiency in industrial processes, contributing to the country’s overall energy performance.

 

A further analysis reveals that the largest share of Bangladesh’s gas consumption, about 40%, is by its power sector, followed by industry (19%) and captive power (18%), with domestic consumption trailing at 13%.

The pattern shifts for electricity, where the domestic sector emerges as the primary consumer, accounting for 52%, followed by commercial 25% and industrial use 13%.The gas, being a more affordable energy source, is allocated to industries, while the more expensive energy sources are directed towards households. This approach achieves a balance and results in a higher conversion rate compared to regional counterparts.

Meanwhile, India, although not leading in the conversion rates, has demonstrated noteworthy progress in its energy efficiency.

The country’s GDP per unit of energy used increased from $2.30 million/ktoe in 2010 to $2.94 million/ktoe in 2022. This improvement can be partly attributed to India’s service sector-led economic growth, which is inherently less energy-intensive than industrial sectors.

However, a large portion of India’s energy—approximately 41%—is consumed by its industry, compared to 26% for domestic use. Despite India’s effective resource allocation, its transport sector, marked by high inefficiency, is a major contributor to the country’s overall low energy efficiency, consuming a substantial share of its energy resources.

Pakistan, for its part, has seen improvement in its energy conversion rate, increasing from $2.8 million/ktoe to $3.3 million/ktoe in 2022. This increase suggests a growing economic value from its energy use, driven by sectors such as manufacturing, agriculture, and services.

However, Pakistan’s energy consumption pattern poses a unique challenge. A large portion of its electricity, around 46%, is consumed by its non-productive domestic sector, while the industry accounts for 28%. When it comes to natural gas, the domestic sector again has a higher consumption rate at 20%, compared to the industrial sector’s 18%. Pakistan has the most inefficient allocation of resources among the countries.

For instance, gas, a more affordable energy source, is predominantly supplied to households, which contribute the least to the GDP.

In contrast, industries receive more costly energy forms and incur higher expenses due to subsidies provided to households for energy cost reduction. Moreover, the policy of providing energy to households at very low prices strains the industries through a higher tariff which, as a consequence, includes cross-subsidy, adversely affecting their competitiveness in the global market. Despite having a lower industrial energy consumption than India, Pakistan’s industry exhibits greater efficiency.

Further compounding the issue is Pakistan’s heavy reliance on fossil fuels, which account for 64% of its total energy, hydropower contributes 27%, and the remaining 9% comes from other renewables and nuclear power. This reliance on fossil fuels not only makes energy less affordable but also exposes the country to vulnerabilities in energy supply disruptions.

Bangladesh faces a similar dilemma. Due to its high reliance on fossil fuels to generate electricity, it is also facing the issue of energy affordability. The country’s energy portfolio is composed of 99% fossil fuels, with dominant contribution of natural gas at 67%. However, its energy affordability problem is being partially compensated by its gains in energy efficiency.

In stark contrast, India’s approach to energy significantly differs, with a strong focus on renewable sources, setting it apart from the fossil fuel reliance prevalent in Pakistan and Bangladesh. By investing in renewable energies like solar and wind, India has achieved more cost-effective energy solutions and competitive market prices, thus carving a unique niche for itself in the regional energy sector.

The analysis of energy efficiency and energy consumption’s impact on economic growth brings to light the importance of formulating energy policies that are specifically designed to suit the unique circumstances of each country.

For Pakistan, improvement in the industrial sector’s energy efficiency reveals a competitive response to global market pressures, in stark contrast to the domestic sector’s apathy towards energy conservation.

A consequence of ineffective and below-cost energy pricing strategies leading to severe misallocation of resources. It’s imperative to acknowledge the substantial role of energy prices in diminishing energy intensity via efficiency improvements.

Ration-alizing energy prices is crucial to incentivizing energy conservation and efficient use through, for instance, adoption of more efficient appliances. As energy prices are rationalized, any increase in prices should be counterbalanced by improved energy efficiency. Hence, it is urgent and essential to aggressively implement pricing policies that will curb the excessive energy demand of the domestic sector.

Gas appliances and any inefficient products in the market are a direct threat to energy conservation and their use must be regulated, including through benchmarking of energy efficiency.

The government must enforce minimum energy performance standard (MEPS) and stringent labeling regulations. No appliance should be allowed to enter the market if it does not meet minimum efficiency standards.

This is particularly crucial considering that a significant portion of domestic electricity in Pakistan, over 67%, is consumed by fans and lighting that do not meet modern energy efficiency standards.

This is not just a recommendation but a critical necessity. Such legislation will steer consumers decisively towards energy-efficient products, drastically cutting down the domestic sector’s energy consumption.

In line with these efforts, in 2023, the government took a decisive step by banning the manufacturing and sale of old, high electricity-consuming bulbs and traditional fans as part of its broader energy-saving initiative. These actions are targeted at achieving significant energy savings, potentially up to 9300MW.

Adhering to the new MEPS, newly manufactured fans are now designed to consume only 60W of electricity, which is half of what traditional fans used, while the energy consumption of light bulbs has been capped at 12W.

The shift towards energy-efficient appliances must be urgently mandated, particularly replacing gas geysers with solar alternatives.This measure alone can save up to 500 MMcfd of gas, thereby providing much needed relief to the balance of payments by reducing the import bill by over $1 billion per annum.

Additionally, upgrading gas burners is critical for further domestic energy savings, offering a potential gas conservation of 200 MMcfd at a one-time cost of Rs 2 billion. The proven success of solar water heating systems, like those in Nathiagali conserving 500 tons of fuelwood annually, illustrates the urgent need for a nationwide adoption.

Moreover, key actions like implementing mandatory annual vehicle efficiency testing and effective national load management can significantly optimize energy consumption patterns.

“For the long term, one of the pivotal steps towards achieving this is the immediate implementation of the Pakistan Building Code. This would ensure energy-efficient practices in construction, leading to long-term energy savings. Moreover, Pakistan’s energy policy, which aims for a higher proportion of renewable energy in its power mix — with a target of 30% from wind and solar by 2030 — and the planned expansion of less carbon-intensive energy sources, also signifies a move towards greater energy efficiency.”

Furthermore, industries and companies can play a crucial role in energy conservation. Implementing an Energy Management System (EMS) allows companies to monitor energy consumption data in real-time and identify opportunities for energy savings.

Another effective approach is the use of Building Automation System (BAS), which optimizes heating, cooling, ventilation, lighting, and other systems in offices and industries. It uses advanced technologies like AI and machine learning to identify energy consumption patterns and implement energy-efficient measures. For instance, the Ministry of Energy and Mineral Resources in Indonesia saved 318,700 KWH in 2019 by implementing BAS in their buildings.

In light of these recommendation, Pakistan’s journey towards resolving its energy paradox requires a multifaceted approach. Given its limited resources, the affordability of energy emerges as a looming challenge. Pakistan’s path to economic stability and growth is intricately linked to enhancing its energy efficiency.

The country must urgently address the misallocation of energy resources, incentivize efficient energy use, and adopt innovative technologies and practices across all sectors. By prioritizing energy efficiency, not only can Pakistan meet its economic goals it will also contribute to global environmental sustainability.

By Shahid Sattar | Amna Urooj

In the expansive arena of economic governance, Ludwig von Mises’ profound assertion resonates: “If one rejects laissez-faire on account of man’s fallibility and moral weakness, one must, for the same reason, also reject every kind of government action.” Amidst this philosophical backdrop, Pakistan grapples with a complex array of economic challenges, demanding a sophisticated and nuanced approach to trade policies.

A disconcerting array of economic indicators paints a grim picture. Over the past five years, the budget deficit has ballooned from 5.8% to a concerning 7.7% of the GDP. The tax-to-GDP ratio has witnessed a precipitous drop from 11.4% to 9.2%, accompanied by a sharp decline in development spending from 4.1% to 2.3%. Public debt, a looming specter, now constitutes a formidable 74.3% of the GDP.

Stark income inequality persists, with the top 10% commandeering 44% of the national income, while the bottom 50% languishes with a mere 16%, resulting in a glaring per capita income ratio of 14:1. In official records, the unemployment rate has risen significantly, climbing from 6.9% in 2018-19 to a concerning 9.5% in 2022-23, affecting more than 7 million workers. Unofficial figures, however, paint a grimmer picture, indicating that the actual unemployment rate may surpass 20%.

Poverty, estimated at 34% in 2018-19, is projected to reach a staggering 46% by 2022-23, affecting over 20 million idle youth. This crisis is further exacerbated by a real wages slump of over 20% in the last two years. The tax burden, distributed unevenly across sectors, contributes to an overall tax incidence of under 10% of the GDP, with a UNDP report suggesting elite capture causing a loss of over 2.5% of the GDP.

 

The industrial contribution to the economy is currently very low, and it has experienced a decline in recent years, with strong indications pointing towards widespread deindustrialization across the economy.

The contraction of industrial production during the 2022-23 economic crisis, intensified by economic volatility, escalating energy costs, inflation, and exchange rate depreciation, has precipitated the permanent closure of numerous firms. This impact is particularly pronounced in the textile and apparel sector, evident in a significant year-on-year decline in power consumption for firms on both LESCO and MEPCO networks. These challenges accentuate the pressing need for Pakistan to embrace an export-centric culture, a pivotal shift considering the country’s gross external financing requirements, which are poised to exceed $25 billion annually for the next five years.

Protectionism, as a set of policies aimed at shielding domestic industries from foreign competition through tools like tariffs, quotas, subsidies and non-tariff barriers, is a focal point of discussion. However, the pervasive call for import substitution as a solution to the ongoing economic crisis reveals a fundamental misunderstanding. The crux lies in the basic premise of international trade, founded on the principle of comparative advantage. In a simplified two-goods-two-economy scenario, each economy optimally produces and exports what it excels at, extending this principle to the diverse goods and economies in the real world.

Economies, as a rule, should export what they excel in producing and import what they lack comparative advantage in. The current discourse in Pakistan, advocating for benefits to “import substitution” industries to reduce imports and enhance the Balance of Payments (BoP), is flawed. Import substitution is inherently unproductive and internationally uncompetitive. Granting benefits and protection to these industries perpetuates inefficient production, leading to elevated prices for domestic consumers and wasteful resource utilization.

The genuine solution lies in fostering export-led growth, where all industries oriented towards exports, bolstering foreign earnings to offset the impact of imports and maximizing economic advantages.

In this strategy, the focus should narrow down to a few key sectors where the economy boasts a comparative advantage. Simultaneously, efforts should concentrate on creating localized backward and forward linkages within these sectors. This approach stands in stark contrast to the impractical notion of attempting to localize the production of an exhaustive range of goods under the umbrella of “import substitution.”

In 2022, Pakistan’s trade policies exhibited a subtle yet complex stance on tariffs, with an exceptionally high applied tariff rate of 98.6% (see table below). According to the WTO’s World Tariff Profile 2023, this rate underscores the challenges and potential adverse consequences of protectionist measures. Such a high applied tariff rate can act as a significant trade barrier, leading to increased costs for imported goods. This, in turn, may have detrimental effects on consumers, businesses, and the overall efficiency of the economy. The focus on applied rates in this analysis aims to shed light on the immediate and tangible impacts of protectionist trade policies. Particularly, the agricultural sector faces comparatively higher tariffs with a simple average applied rate of 10.3%, while non-agricultural products face a rate of 13.1%. Trade-weighted averages for agricultural (8.7%) and non-agricultural (6.4%) goods further highlight variations within different product categories.

Examining specific product groups, the tariff analysis unveils limited duty-free imports and a prevalence of applied tariffs falling within the 15% to 25% range, particularly for non-agricultural products. Distinct variations emerge among product categories, with higher average duty rates for non-electrical and electrical machinery, in contrast to lower rates for petroleum and chemicals. Major trading partners for both agricultural and non-agricultural products include the European Union, China, the United Kingdom, and the United States.

The analysis of Most Favored Nation (MFN) applied duties in Pakistan, India, and Bangladesh sheds light on the implications of protectionist measures on the Pakistani economy. While Pakistan generally maintains lower average duties, indicative of a relatively open trade policy, the impact of protectionism extends beyond duty rates to encompass non-tariff barriers and subsidies. Striking a balance is crucial; lower duties in sectors where Pakistan has a comparative advantage, such as cotton, suggest the potential benefits of an open trade approach. However, protectionist measures, if not carefully calibrated, could lead to inefficiencies, reduced competitiveness, and missed opportunities in global markets. The key lies in fostering an environment conducive to export-led growth, protecting domestic industries judiciously, and ensuring overall economic efficiency for sustained growth.

 

Debates are useless without factual concepts, and to begin with, Pakistan’s economy has not been performing well. Foreign exchange reserves started at $4.5 billion at the beginning of the current financial year, and the national currency, the rupee, depreciated by over 81% in the last two years. External debt stands at nearly $128 billion, constituting almost 43% of the GDP. Cumulative external financing requirements, net of likely rollovers, are projected to exceed $55 billion from 2023-24 to 2025-26.

The World Bank, in its 2023 feature story titled “Protectionism Is Failing to Achieve Its Goals and Threatens the Future of Critical Industries”, expresses heightened concerns regarding the repercussions of protectionism on global trade. Despite escalating trade tensions and geopolitical challenges, global trade showcases remarkable resilience, an observation that gains significance as protectionist measures become more prevalent, prompting discussions about deglobalization. This evolving landscape unveils three distinct paradoxes in global trade, each with implications that resonate with Pakistan’s economic context:

I. China’s increased centrality amid the US-China trade war

II. The growing significance of global value chains:

Contrary to expectations, disruptions such as the US-China trade war and the COVID-19 pandemic have failed to weaken global value chains. Instead, these chains have increased in significance, challenging predictions and underlining their enduring importance in global trade. For Pakistan, actively participating in global value chains, especially in sectors like textiles, becomes even more crucial as the paradox emphasizes the continued integration and relevance of these chains in the face of protectionist headwinds.

III. Firms persist in global connections despite challenges

These paradoxes underscore the dynamic nature of global trade in the context of protectionism and highlight potential strategies for Pakistan to navigate these challenges. Increased international openness and cooperation would better achieve the goals currently pursued through protectionist measures.

The World Bank also emphasizes the need for a new consensus on global rules to address international tensions and benefit all countries. The problem is not excessive globalization but excessively narrow regulation, advocating for a global set of rules covering various aspects beyond trade.

 

Recognizing the failure of protectionism and import substitution approaches, the emphasis on export-led growth becomes imperative. The need to increase foreign exchange earnings is highlighted as an alternative to falling deeper into the debt trap. Fostering an open and competitive international trade environment is essential for stabilising industries, encouraging growth, and creating opportunities for market diversification. Free trade, by fostering global economic cooperation, can mitigate the impact of economic downturns on individual countries by providing opportunities for market diversification, access to resources, and the possibility of stabilizing industries through increased exports and market competitiveness.

Trade liberalization in developing countries, like Pakistan, sparks debate. Advocates argue it boosts efficiency, expands markets, and fosters competition, contributing to economic growth. Theoretical models support this, but critics highlight uneven benefits and the role of domestic policies. Empirical evidence from scholars like Kruger, Taylor, Robinson, Barro and Martin, Romer, Chamberlin, Dollar and Karray, Vallumea, and Ahmad suggests trade openness enhances efficiency, productivity, and technological progress, emphasizing the importance of human capital and supportive policies. Overall, the literature underscores the need for extensive trade liberalization for effective economic growth in developing nations.

Case Study 1: Tariffs on polyester staple fiber in the textile industry

Pakistan’s textile industry, historically a significant contributor to the economy, has faced challenges, witnessing a decline in contribution and employment trends. The economic crisis in 2022-23, marked by high volatility, rising energy costs, and exchange rate depreciation, led to the closure of several textile firms, with a substantial decrease in power consumption across the sector.

Export-led growth is crucial for Pakistan, evident from the failure of protectionism and import substitution strategies.

The imposition of tariffs and protectionist measures on polyester staple fiber (PSF) in Pakistan has adversely affected the textile industry, impeding its global competitiveness. Despite the increasing global demand for synthetic fibers, particularly polyester, Pakistan’s textile industry has been slow to shift from conventional cotton, limiting its share in the expanding market for synthetic textiles. Garment exports still favor cotton at an 80:20 ratio, with only a quarter of spinning machines utilizing man-made fibers.

Moreover, the concentration of global polyester staple fiber production in countries like China, India, and Southeast Asia, which dominate synthetic textile exports, highlights Pakistan’s limited participation in the MMF (man-made fiber) apparel market. Protectionist policies and the absence of a fully integrated chemical industry for synthetic polymers hinder Pakistan’s progress in this sector. Adequate raw material availability could have boosted the country’s share in the global synthetic textiles market, but domestic policies influenced by protectionist measures have impeded tapping into this potential.

To boost Pakistan’s textile industry, the 12% customs duty on Polyester Filament Yarn (PFY) should also be eliminated, ensuring no import duty on this crucial raw material. Aligning withholding tax (WHT) and abolishing the 3% value addition tax (VAT) at the import stage for PFY is vital. The current policy, with total import duties reaching 20%, including antidumping duty, hampers PFY industry growth and raises costs for end-users. Additional Regulatory Duty exacerbates challenges, underscoring concerns about protectionist measures impacting the textile sector. Creating a competitive and open market is essential for the industry’s success.

On the other hand, to enhance its global competitiveness, Pakistani manufacturers must build industry capacity for producing textile articles based on man-made fibers, recognizing the growing demand in the global market for synthetic or man-made fibers (MMF) over traditional cotton articles. While the input is duty-free for qualifying firms under certain schemes, a significant 80% fail to meet the criteria. However, these non-qualifying firms, despite lacking duty exemptions, play a crucial role as technology capacity incubators, especially in the absence of Polyester Staple Fibre (PSF), fostering cultural development. Unfortunately, Pakistan has struggled to fully leverage benefits from initiatives like GSP+ due to an economy heavily reliant on textiles and a lack of awareness and interest among traders, impeding the country’s ability to exploit the full advantages of such programs. It is also to be noted that Pakistan misses out on around 70-80% of the export lines to Europe where the MMF is heavily concentrated, indicating a lack of full utilization of GSP+ benefits.

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Case Study 2: Protectionism in agriculture

Protectionist policies in Pakistan’s agriculture sector, intended to bolster local farmers and ensure food security, have faced limitations in achieving their goals. Contrary to expectations, the academic text indicates that the gains from agricultural trade liberalization surpass those from protectionism. Many studies, such as the one conducted by Ahmad, Khan, and Mustafa (2022), suggest that protectionist measures have not significantly benefited Pakistani farmers, with richer rural households reaping more substantial rewards under trade liberalization. Concerns about income distribution among vulnerable populations, particularly poor rural households, have arisen, challenging the assumption that protectionism leads to improved food security.

Moreover, the implications of protectionism extend to international trade relationships. While protectionist measures aim to shield domestic agriculture, many studies such as the one conducted by Ahmad, Khan, and Mustafa (2022), point out that exposing the sector to foreign competition through liberalization may result in concerns about market access and potential losses for less-developed countries. The broader economic impact is underscored by the conflict among empirical studies regarding gains from agricultural trade. Despite marginal economic growth, protectionist policies in Pakistan have not effectively addressed income inequalityas they often benefit select industries and contribute to higher prices, disproportionately impacting lower-income individuals and hindering overall economic growth and job creation, emphasizing the need for a distinct approach that considers welfare, income distribution, and global trade dynamics when evaluating the efficacy of trade policies in the agriculture sector.

Insights from both case studies affirm the documented inefficiencies stemming from protectionism, particularly in sectors such as agriculture, automobiles, polyester staple fiber, and glass.

The textile industry, the cornerstone of Pakistan’s economy, faces decline amid economic challenges, highlighting the imperative shift towards an export-centric approach. While Case Study 1 extols the benefits of free trade for sectors like textiles, Case Study 2 underscores the limitations of protectionist policies in agriculture, revealing that trade liberalization offers more significant gains than protectionism, especially for poorer rural households.

“The broader implications on income distribution and international trade relationships emphasize the need for subtle yet effective approaches that consider welfare, income equality, and global trade dynamics in evaluating the efficacy of trade policies in these critical sectors.”

By Khalid Mustafa

ISLAMABAD: The country’s power sector has lost billions of rupees in revenue as high electricity tariffs have cut the consumption of export-oriented industries by up to 49 percent in some areas, an industry group said on Tuesday.

The All Pakistan Textile Mills Association (APTMA) said in a letter to the energy minister that the power consumption of textile and apparel firms had declined by 49 percent on the Lahore Electric Supply Company (LESCO) network and 36 percent on the Multan Electric Power Company (MEPCO) network in October 2023, compared to the same month last year.

The consumption has fallen after the government increased the power tariff to 14 cents per unit for export industries – the highest in the region – and made them uncompetitive in the global market, APTMA said.

The power sector revenue from these industrial units was over Rs1.1 billion less on the LESCO network alone in October 2023, the letter said, adding that the actual losses were likely to be much higher.

“This has nullified the argument that any substantial increase in power tariffs will increase the power sector’s revenue collection and reduce capacity payments for all consumers. If the status quo is maintained, industrial production and electricity consumption will continue to decrease, which will further worsen the economic situation.”

The letter suggested to Energy Minister Mohammad Ali that the only way to avert this crisis is to provide the export sector with power tariffs that exclude cross-subsidies, stranded costs, and other economic inefficiencies.

APTMA argued that following the withdrawal of regionally competitive energy tariffs and power tariff rebasing earlier this year, power tariffs for export-oriented industrial consumers increased from 9 cents per unit to 14 cents per unit, which is almost twice the average prevalent for export sectors in regional economies.

The letter mentioned that high tariffs have caused export firms to be priced out of international markets and lose export orders to competitors with significantly lower power tariffs in regional economies.

APTMA’s analysis suggests that above a threshold of 12.5 cents per unit, export-oriented firms are increasingly forced towards closure and the export sector is crowded out in due course. At the same time, domestic industries also face weak demand as rampant inflation has eroded consumers’ purchasing power and this has in turn lowered manufacturing activities and therefore industrial power consumption across the board.

“Declining consumption of electricity, increasing capacity charges, and decreasing revenue are causing power tariffs to increase continuously, as also evidenced by the Quarterly Tariff Adjustment for the first quarter of ongoing FY24, which will cause consumption to decline even further.”

APTMA also argued that in addition to direct implications on power sector revenue, there are also significant implications for the entire economy. “Exports went down 15 percent in November 2023 compared to the same period last year. If the energy prices remain regionally uncompetitive, any recovery to pre-crisis levels of exports can be ruled out.”

“The country’s economy will continue to face balance of payments and exchange rate pressures, which will further add to debt servicing costs and other fiscal challenges, fuel inflation, and rule out a decrease in interest rates for the foreseeable future and continue to weigh down on industrial and economic growth.”

The letter also pinpointed that as the slowdown in industrial activity worsens, direct and indirect employment in upstream and downstream sectors will be reduced even further, affecting millions of livelihoods.

By Mushtaq Ghumman

ISLAMABAD: Electricity consumption of the textile sector in the jurisdictions of Lahore Electric Supply Company (Lesco) and Multan Electric Power Company (Mepco) has declined massively due to higher tariffs and the withdrawal of concessional tariffs.

In a letter to Minister for Power, Muhammad Ali, All Pakistan Textile Mills Association (Aptma), has stated that following the withdrawal of regionally competitive energy tariffs and power tariff rebasing earlier this year, power tariff for export-oriented industrial consumers increased from cents 9/kWh to almost twice the average prevalent for export sectors in regional economies.

According to the textile sector, it has repeatedly indicated throughout the year that high tariffs have caused firms to be priced out of international markets and lose export orders to competing firms in regional economies with significantly lower power tariffs.

APTMA assails ‘unprecedented’ gas tariff hike

“Our analysis suggests that above a threshold of 12.5 cents/kWh, export-oriented firms are increasingly forced towards closure and the export sector is crowded out in due course,” said, Shahid Sattar, Executive Director Aptma in his letter.

He said that at the same time domestic industries also face weak demand as rampant inflation has eroded consumers’ purchasing power and this has, in turn, lowered manufacturing activities and therefore industrial power consumption across the board.

In October 2023, for instance, power consumption of APTMA member firms declined by 49 percent on the Lesco network and 36 percent on the Mepco network, year-on-year.

The negative impact of higher power tariffs on volumetric consumption has more than offset any revenue gains from the price effect such that the absolute impact of higher power tariffs on power sector revenues has been negative.

Just on the Lesco network, power sector revenue from Aptma member firms was over Rs 1.1 billion less in October 2023, compared to the same month last year. Actual losses are likely to be much higher because had the power tariff remained at cents 9 per unit, power consumption would have increased as overall economic conditions showed an improvement starting FY24.

Moreover, this is not a one-off phenomenon as power consumption of textiles and apparel firms has been on a downward trajectory since the withdrawal of RCET earlier this year and is expected to decline even further in the coming weeks and months.

As it stands, declining consumption, increasing capacity charges, and declining revenue are causing power tariffs to increase continuously, as also evidenced by the Quarterly Tariff Adjustment for FY24Q1, which will cause consumption to decline even further.

These short-sighted policies have given rise to a vicious and never-ending cycle of decreasing consumption and increasing power tariffs that the country is forever stuck in. The increase in power tariffs is having the opposite impact from what was intended and a fast-track policy review on this issue is urgently required.

In addition to direct implications on power sector revenue, there are also significant implications for the entire economy. Exports for November 2023 were down 15% compared to the same period last year. If energy prices remain regionally uncompetitive, any recovery to pre-crisis levels of exports can be ruled out.

As such the economy will continue to face balance of payments and exchange rate pressures, which will further add to debt servicing costs and other fiscal challenges, fuel inflation and rule out a decrease in interest rates for the foreseeable future, and continue to weigh down on industrial and economic growth.

As the slowdown in industrial activity worsens, direct and indirect employment in upstream and downstream sectors will reduce even further, affecting the livelihoods of millions of households.

In turn, these effects will again increase various power sector costs such as capacity charges and fuel prices, further decrease power consumption, and necessarily increase power tariffs for all consumers based on how the current process is designed.

“The only way to avert this crisis is by providing the export sector with power tariffs that exclude cross-subsidies, stranded costs, and other economic inefficiencies.

This will allow the industry to become competitive again, resume manufacturing activities, significantly increase industrial power consumption, and provide gainful employment opportunities for millions across the country,“ said Shahid Sattar.

The increase in volumetric consumption will greatly offset any price effect from removing the cross-subsidy, resulting in a net increase in power sector revenue.