Economic melt-down in the making?

 

Pakistan’s oil import bill has widened by over 97 percent to $4.59 billion in the first quarter of current fiscal year (3MFY22) from $2.32 billion over the corresponding months of last year owing to a sharp spike in world oil prices and depreciation of the rupee to almost Rs 173 to a dollar. Crude oil imports rose by 81.15 percent in value and dipped 2.35 percent in quantity during the months under review while those of liquefied natural gas increased by 144.02 percent in value.

The second biggest take of import bill is of food items. The food import bill widened by over 38.03 percent to $2.36 billion in the first three months of the current fiscal year from $1.71 billion over the corresponding months of last year to bridge the gap in food production. The food import bill will go up further in the next few months because the government has decided to import 0.6m tonnes of sugar and 4m tonnes of wheat to build strategic reserves.

The total import bill has shot up by 66.11 percent to $18.74 billion in July-Sept FY22 as against $11.28 billion over the corresponding months of last year.

The federal government, consequently, has raised the price of petrol by Rs10.49 per litre and that of high speed diesel (HSD) by Rs12.44 per litre. According to a notification issued by the Finance Division, the new price of petrol, effective from Oct 16 is Rs137.79 per litre while high speed diesel will sell for Rs134.48. Meanwhile, the prices of kerosene and light diesel oil (LDO) were increased by Rs10.95 and Rs8.84 per litre, respectively. The new price of kerosene is Rs110.26 per litre and that of LDO is Rs108.35 per litre. This is perhaps the first time for which data is publicly available that all the four major petroleum products are being sold above Rs100 per litre in the country. The notification stated that oil prices in the international market had risen to around $85 a barrel which was the highest since October 2018. “Importantly, entire energy chain prices have witnessed a strong surge in the past couple of months due to higher demand for energy inputs and supply bottlenecks,” it further stated. It is pertinent to mention here that the government had raised the price of petrol by Rs4 per litre at the start of the month as well. Coal, through which electricity is generated and is used in a lot of our industries … its price has risen from $50 to $250. We import all of the edible oil. Its price has gone up from $500 to $1200 and $1300. This is extraordinary inflation that has taken place in the entire world.

In a bid to remain in the International Monetary Fund (IMF) programme, the government on Thursday sought the federal cabinet’s approval to increase electricity tariff by Rs1.68 per unit or nearly 14%. The maximum per-unit electricity price is proposed at Rs24.33 per unit for domestic consumers – that is almost double the average per-unit cost of generation of Rs12.96 per unit. It is the second time in the past nine months that the Pakistan Tehreek-e-Insaf government has decided to increase the electricity prices. In February this year, the government had also increased the electricity prices by Rs1.95 per unit or 25% on account of annual tariff adjustment.

By the end of the current fiscal year our total import bill is likely to go through the ceiling as global oil and gas prices are predicted to keep rising steeply as the demand worldwide would be picking up at a faster pace in the wake of acceleration of economic activity all around as one sees a brisk tapering off in the incidence of Covid-19 worldwide.

What would follow from this would be simply horrendous: trade deficit would expand to dangerous levels as export earnings are not expected to keep pace with the import bill, followed by further depreciation of the rupee giving a free rein to inflationary bouts of calamitous proportions resulting in the teeming millions of our have-nots facing deprivations of worst order.

The decision to increase the prices was taken during the time when Tarin was in Washington to conclude the talks with the IMF under the 6th review that began in Islamabad on October 4. The successful culmination of the talks would have paved the way for the release of the next loan tranche of $1 billion.

“We are still negotiating. Nothing is final”, said Tarin from Washington while responding to questions about the increase in prices and rationalisation of the PSDP. The acceptance of three key demands – the increase in electricity prices, levy of additional taxes and reduction in the PSDP spending could pave the way for successful conclusion of the 6th review during the second attempt after the first attempt failed in June this year. A delay in announcement of successful conclusion of talks by the IMF could create more uncertainty in Pakistan particularly at a time when the rupee is already hitting the historical low of Rs172.77 to a dollar.

As the most traded good, energy is involved in everything we buy and consume, so energy prices and shortages significantly impact economic growth. Because energy is the most important input in manufacturing, stable prices and supplies are key to economic competitiveness. Electricity and fuels for heating, cooking, and transport are major items in every household budget, and price increases disproportionally affect the poor. Similarly, government institutions and infrastructure need stable and affordable energy supplies to function, putting public safety and health at risk when electricity supplies aren’t steady. Energy security has to be treated like national security, and governments need to ensure it.

To escape the on-coming train of shortages and steeply rising inflationary trends Pakistan urgently needs to return to Balochistan looking for oil and gas as exploration costs have, as a consequence, become economically more viable on the back of rising prices of fossil fuels in world markets and; to KP as well for exploiting its numerous waterfalls for generating electricity which is said have the potential to produce as much as 40,000MW of electricity with very little local investment and low-tech.

The demand-supply situation of fossil fuel worldwide has sent the prices of gas and oil sky rocketing. So much so that even the rich and the not -so -rich countries are finding these prices going out of their reach forcing them to fall back on coal causing shortages of coal and its prices as well to rise sharply.

The first energy crisis in decades has come as a shock to many in the world. The current crisis is particularly acute in Europe. Prices for natural gas, coal, and electricity have exploded leading to protests over household power bills in Spain, 1970s-style gasoline shortages in Britain, and worryingly low supplies of natural gas across much of the continent as a possibly very cold winter is fast approaching.

Moreover, because the main renewable sources of energy—solar and wind—are highly variable depending on the weather, utilities must maintain an entire second network of always-ready backup power plants using natural gas, coal, or other sources in order to ensure a stable electricity supply and prevent blackouts. Maintaining this spare capacity, which sits idle when the sun shines and the wind blows, naturally costs a lot of money. It is not paid by the renewable energy producers but by the power utilities, which pass those costs on to the public. In response to rising energy prices, governments in the United Kingdom, France, Spain, and elsewhere have stepped in with new price ceilings, abandoning all semblance of a market.

And the systematic closing of nuclear power plants in several European countries (including almost the entire German fleet) following the Fukushima Dai-ichi accident has removed a secure and steady source of clean energy and is said to be one of the main factors behind the current energy crisis.

Coal remains the bedrock of India’s energy supply, powering 75 percent of electricity generation. The country has an estimated 100 billion tons of coal reserves. The current coal shortage—coal-fired power stations are down to an average of only four days’ worth of stock—is expected to cause significant power outages in this coal abundant country.

Meanwhile, more than half of China’s provinces have been rationing electricity over the past couple weeks, disrupting the daily lives of tens of millions of people. It’s the worst electricity crisis China has faced in a decade. The immediate cause is that China is still highly dependent on coal, which provides 70 percent of the country’s power generation. The electricity prices paid to generators are regulated by the central government, while coal prices are set on the market. When coal prices rise, unless regulators increase electricity prices, it doesn’t make economic sense for coal power plants to keep supplying electricity.