August 28, 2023 (MLN): Panic, frustration, resentment and depression are spreading faster than COVID-19 in Pakistan. Recent electricity bills in Pakistan's summer season have sent shockwaves. Lower and middle-class earnings have been wiped off to the point of despair and hopelessness. Arguably, it has never been this bad. 

Let's stop blaming the IMF to start with. Electricity costs comprise several components; capacity charges, taxes and surcharges, fuel costs, T&D losses, theft, low recovery & cross-subsidies. Most of these are entirely dependent on currency rates. So if your headline domestic currency falls, it takes millions with it. 

Not passing the fuel costs and subsidizing is just not an option. Govt has had to rightly pass on the immediate burden as there is no fiscal space to absorb the costs. With no electoral fears, the caretaker's task is to do what's right in the long term and under IMF, we need to pass on the cost. Period. 

A high-powered committee may advise deferring some recovery in a staggered way. But that deferral in itself will need to be paid by the consumer in the form of higher interest on the debt taken by the government to fund the subsidy. It's a time bomb that we can't avoid culmination of 15 years of imprudent economic policies, there is no short-term fix.

First and foremost, do whatever it takes to increase your exports of goods and services so that currency doesn't plunge 2x from PKR 100 to PKR 300/USD in 5 years. People merely get an 8-12% salary increase per year. With a nominal 50-60% increase in incomes, you have bereft them 50% poorer in dollar terms. 

Secondly, get rid of these burdensome DISCOs once and for all. By handing them over to provinces, you're deferring the problem not solving it. Yes, the federal govt is saving its fiscal space but the provincial has less incentive to run as efficiently as the private sector. Such political power is addictive to be let go of and ultimately affects the masses at large. 

Thirdly, we're soon heading towards overcapacity and already are to an extent. With three bouts of macro-compression in 2019, 2020 and 2023, demand for electricity will be muted at best thus creating a vicious cycle of higher rates with a smaller base of consumption. Brace for the gas hike.

Lastly, govt should boldly incentivize marginal consumption by industries to spur growth and stick to the game plan. Give people assurances that fuel will remain stable over the next few years (requiring assumptions over fuel cost and currency), incentivize a reduction in theft & T&D losses and utilize more low-cost hydel, nuclear & other sources. 

It's time to gradually open the market by enabling more than one provider of electricity before social order is disrupted. Millions are fed up with policymakers and see no hope of recovery. Solarizing is also becoming an expensive luxury for many and will shift good consumers away. The country can not afford economic contraction.

The author is an independent economic analyst and writes on Twitter and Linkedin.

Posted on: 2023-08-28T09:39:19+05:00