Pakistan: The Urdu Rate Of Growth

Courtesy of The Economist, a detailed look at Pakistan’s economy and the impact that power shortages have upon its development:

EVEN the swankiest chandelier is not much use these days without electricity. Just as Shahbaz Sharif explains Pakistan’s new energy policy, his Lahore home plunges into darkness, briefly hiding him, his oil paintings and a fine china tea set. Has Punjab’s chief minister staged a blackout for dramatic effect? Laughing, he denies it: power cuts are routine. City dwellers endure as much as ten hours of cuts a day; villagers are usually without power for much longer. On occasion, supply has fallen 40% short of national demand.

Chronic electricity shortages vie with some heavyweight contenders to top the list of Pakistan’s biggest problems. Mr Sharif’s brother is the prime minister, Nawaz Sharif, who won a general election last year promising to fix the country’s electricity mess. Without reliable power, Pakistan will struggle to lift a dismally low rate of economic growth—just 2.9% a year on average for the past five years, not much more than the 2% annual growth of the population, now 186m-strong. Thanks to a stagnant economy, millions of young Pakistanis are without jobs or regular incomes, especially in the burgeoning cities. Poverty and bleak prospects must surely be contributing to the extremist violence that daily rocks the country.

Fixing the mess means cutting through immense and intertwined problems. Private power firms produce much less than they could, because the state purchaser does not always pay them. In turn, electricity consumers, among them the federal and provincial governments, do not pay the state purchaser. It creates a “circular debt”, which reached $5 billion at its peak. The government last year said that it had, in effect, cleared that debt. But the IMF, for one, warns that it can build up again.

Shahbaz Sharif, who has a national role helping the prime minister on economic policy, says that many consumers continue to pilfer electricity and gas. Some, such as some madrassas (religious schools), refuse to pay even a fraction of their bills, confident that no one would dare cut them off. Liquefied natural gas (LNG), a growing portion of Pakistan’s energy mix, sells at a sixth of its import price. A plan to raise residential electricity tariffs was scrapped in October after judges objected. That ruling may be revisited now that a populist chief justice has retired.

Consumers might be keener to pay if only they got more in return. State-run generation and distribution companies are so ill-managed that the Punjabi cities of Gujranwala and Faisalabad run at 10% capacity. The government’s response is to order the urgent sale of 31 energy and other businesses.

Fixing dysfunctional energy firms would do most to unleash the country’s economic potential, says Mohammad Zubair, the privatisation minister, parachuted in from IBM. Management by state firms is “a disaster”. He talks of gross overstaffing, incompetent engineers and poor financial control. Combined annual losses at all state-run companies have reached $4.7 billion, equivalent to a third of all tax revenue. Private investors must be found to take over, Mr Zubair says, because “the government can’t spend more”.

The biggest task, however, is to change the country’s ill-judged energy mix. About a third of its electricity comes from oil-fired power stations. Many were commissioned in the late 1980s, when crude oil was cheap. With oil now over $100 a barrel, they are desperately expensive. Pakistan spends over $14 billion a year importing oil and other energy products, a big hard-currency bill. Another third of energy comes from gas, much of it also imported. Reliance on imports will certainly grow. Three new LNG import terminals are to be built by 2016, raising capacity by half. And the government this week again confirmed grand plans to bring in natural gas across the border from Iran (and perhaps, in turn, to export some of it to India). But that will remain a pipe-dream for as long as the United States, Pakistan’s biggest donor, is opposed to it. In any case a major pipeline would be vulnerable to violent groups, including Baluchi separatists and the Taliban outfits increasingly active in the south.

Other options exist. Billions of tonnes of coal reserves sit in Sindh province, yet coal accounts for a tiny part of electricity generation. A new plan orders several new coal-fired stations, with Chinese money and help, but even then fuel would be imported from Malaysia. China is also lending money to expand the civil nuclear programme. In November the prime minister inaugurated a $10 billion, 2200MW nuclear plant to be built by 2019, for Karachi, a city of 18m; understandably, there are worries about safety. New plans for solar parks and more hydropower are also trumpeted.

Nothing will fix Pakistan’s energy problems quickly. Long blackouts are certain when temperatures rise again this summer, but gains could show in about three years—in time for the next election. Muhammad Mansha, an industrialist and Pakistan’s richest man, is optimistic that the government’s attempts to grapple with the power sector will boost business confidence and the economy more widely. Chinese investment in the garment industry is a shot in the arm, as is the removal of import tariffs on Pakistani garments going to the European Union. The EIU, a sister company to The Economist, predicts annual GDP growth of nearly 4% a year until 2018.

Mr Mansha sees other hopeful signs, particularly in Pakistan’s abysmally skimpy trade with India. His cement company’s exports of 700 tonnes a day to India are up from 300 tonnes a year ago, and he expects that to double again. On February 14th India’s commerce minister, Anand Sharma, was due in Lahore for a joint announcement to open the land border to cargo for 24 hours a day and to allow container transport—though he cancelled the trip at the last minute. Currently the border is open only during daylight, and—astonishingly—much is unloaded and loaded onto fresh lorries on the backs of porters. If the myriad restrictions went, a Delhi think-tank says, bilateral trade could quickly rise tenfold, from just $2.6 billion a year.

One day cross-border trade in energy could follow. Hydropower in disputed Kashmiri territories, for example, would be best exploited if India and Pakistan co-operated. India has offered to extend its electricity grid across the border in Punjab and to arrange gas imports for Pakistan, though so far nothing has come of it. Pakistan, in turn, could export coal to India, a hungry consumer of the stuff. Huge mutual gains in energy co-operation are to be had—if only the two countries were serious about achieving them.

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