ISLAMABAD:
Exports have become uncompetitive after the government doubled gas prices for in-house power generation by factories, thus, the three-year goal of increasing exports to $60 billion may be missed, the Pakistan Business Council (PBC) told Prime Minister Shehbaz Sharif on Tuesday.
What a paradoxical situation it is as the miseries of industries are an achievement for the government that has met an International Monetary Fund (IMF) loan condition to either make gas unaffordable for in-house power generation or completely cut it off.
The government has chosen the first option, which became the reason for the PBC — a representative body of manufacturers — to write a letter to the prime minister.
“Your $60 billion export target by 2027 is unlikely to be achieved. The competitiveness of manufacturing for the domestic market, which reduces reliance on imports, will also suffer due to the higher cost of gas,” the PBC wrote to the PM. Pakistan’s exports this year are expected to increase to more than $35 billion but this is insufficient to take the nation out of the debt cycle.
The Economic Coordination Committee (ECC) of the cabinet last week increased gas prices for in-house power generation — known as captive power plants (CPPs) — by 18%. In addition to that, the government on Sunday promulgated an ordinance to impose a special levy of up to 20% in four phases ending in August next year. The first phase has come into effect from Sunday with the imposition of 5% levy while the second phase will be rolled out in July.
The increase in gas price for the CPPs, followed by the imposition of additional levies, would take the cost of gas up from Rs2,400 per million British thermal units (mmBtu), or $8.8, in November 2023 to Rs4,200 per mmBtu ($15) once the full levy was imposed, the PBC said.
It stated that at $15 per mmBtu, the cost would be more than double the amount charged from captive units for gas supply in Bangladesh. Once all the levies are implemented, the cost could even exceed the then prevailing global cost of re-gasified liquefied natural gas (RLNG).
The lobbyist body of manufacturers stated that electricity tariffs for the industry in Pakistan were already amongst the highest. At 17 US cents per unit, the industrial tariff is significantly higher than 6 to 8 cents per unit in India and Vietnam and 9 to 10 cents per unit in Bangladesh and elsewhere.
More than 50% of Pakistan’s export volume is produced in plants that rely on gas-fueled captive power. Manufacturing, which provides jobs and generates exports, is now Pakistan’s least attractive sector for investment and growth, it added.
However, Finance Minister Muhammad Aurangzeb during a luncheon address to the PBC last week said that there were only 1,100 gas connections for the CPPs out of the total 5,600 industrial connections.
The IMF had initially imposed a condition that called for completely disconnecting gas supply to the CPPs that were paying less than the imported gas prices. The government then renegotiated with the IMF and proposed to continue supplies but make prices unaffordable.
Making gas prices unaffordable for in-house power generation was one of the two hardest IMF conditions along with rolling out new agricultural income tax regimes in provinces. The finance ministry sees these achievements as a guarantee that the first review of the IMF programme will be successfully completed.
The PBC said that the increase in gas prices may deny any benefits to Pakistan due to the United States’ decision to impose tariffs on imports from China.
With the higher cost of gas, Pakistan is unlikely to benefit from the diversion of orders, “which our competitor countries will gain”. Making gas more expensive may also not achieve the objective of shifting all industries to the grid, the PBC said.
Some will not be able to gain access to the grid in the short time envisaged in the special levy ordinance. Others will need to spend hefty amounts to get access on top of their earlier investment in establishing modern captive power units when reliable power was not available from the grid, it said. Most industries can be expected to increase their reliance on alternative energy, resulting in further outflow of precious foreign exchange for solar and other equipment, it added. If some captive-powered industries shift to the grid, SSGC and SNGPL will lose their most reliable, high-paying customers and be left with mostly lower-tariff domestic consumers.
The resulting deficit of the gas companies will need to be covered either by the government or by increasing gas tariffs for domestic users, which is a tough political call. In the meantime, the vital objective of export growth would have been compromised, according to the PBC.
It demanded that the government reconsider the broader ramifications of the move to increase gas prices that would make exports less competitive.
