Justifying increase in energy tariffs

In a lengthy meeting with businessmen, Advisor to the Prime Minister on finance Dr. Abdul Hafeez Sheikh justified the repeated increases in electricity and gas tariff as necessary evil and also hinted that regressive indirect taxes based fiscal policy will continue for some more years. He described it as part and parcel of long term policy to stabalise the economy. He did not tell the root cause that why prices of energy inputs are sky-high in Pakistan as compared with other countries of the region which has terminated the comparative advantage of Pakistan’s exports and government has to provide electricity and gas at subsidised rates to five export industries.

The major cause of continued increase in electricity tariff is the shady power purchase agreements which were made with IPPs in the PPP second tenure of government and Chinese power producing companies in the last PML-N government. The government is unable to successfully renegotiate like Musharraf government the tariff reduction with private power producer. During the previous government the NDTC indulged in litigation with nine IPPs but lost its case in the London Court of International Arbitration (LCIA). An appeal was filed in London High Court against the arbitration court decision but it was hastily withdrawn. NTDC had to pay Rs. 11 billion to IPPs plus Rs. 600 million as litigation charges. Interestingly, former President of IPPs Association Nadeem Babar is holding the important portfolio of Advisor to the Prime Minister on Petroleum and Natural Resources in the incumbent government. Another contributory factor of high electricity tariff is the pilferage and default of electricity bills by influential political and business elite which has swollen to Rs. 870 billion. The 40 percent payment for the idle plant capacity of thermal power plants, default of bills and electricity stealing are the major causes of power sector circular debt of Rs. 1.20 trillion which the minister of energy and power Omer Ayub Khan claims to bring to zero level by December 2020. Increase in gas tariff has been caused by stealing and default of bills by industrial and commercial consumers in addition to the thousands of illegal domestic and commercial connections in the gas producing districts.

Compelled by the massive revenue short fall, the government is abolishing the zero-rat facility of sale tax exemption to five export industries which include textiles, leather goods, carpets, surgical goods and sport goods. Reasonable amount of subsidy has also been given to these five industries by the present government to sustain them competitive in the international market. But the government now believes that exemption in sale tax on export products is being misused for tax evasion on domestic sales of export quality goods. In the same meeting the businessmen who are running these industries in Punjab pleaded for continuing the zero-rated facility but the deadlock could not be broken. The business community believes that withdrawal of this facility would result in delay in the sales tax refund by the Federal Bureau of Revenue (FBR) which will cause liquidity problem for them. It is pertinent to mention that delay in sales tax refund in the previous government hit hard the exports. The business community is also of the view that abolition of this facility will offset the positive impact of subsidy that the government has given in electricity and gas tariffs to make zero-rated exports competitive in the international market. The government had fixed the gas rates at $6.5per mbtu for the exporters of Punjab. Similarly, the electricity rate had been fixed at $ 0.75 per unit. The energy prices had been decreased for the export industries in Punjab. Disappointed over the deadlock on this issue in talks with the Advisor on Finance, the business community of Punjab now intends to have a meeting with the Prime Minister.

Talking to representatives from APTMA, automobile and agriculture sector Advisor on finance stressed the need for the promotion of barter trade with an exclusive focus on boosting export of Pakistani products in the global market. How this can be made possible in the WTO regime is a million dollar question? Precedents of bilateral trade in national currencies under the open ended exchange policy between the trading partners are available. The bilateral trade between Iran and India in Rupee and Riyal is an example of the recent past. Return to the medieval age barter trade is not possible. However, on bilateral basis better terms of trade in national currencies is an option. If return to barter trade was that simple then Malysian Prime Minister Dr. Mahatir Mohammad would have not mooted the idea of a common trading currency pegged to gold for East Asia at the Nikkie Future Asia Conference on 30th May. The recipe of increasing the tariffs of energy inputs and regressive indirect taxation for revenue generation is hitting hard the economy.