FeaturedNationalVOLUME 19 ISSUE # 17

Energy challenges imperil exports

Pakistan, with its rich economic potential, faces a significant hurdle in its pursuit of boosting exports – the challenge of ensuring a reliable and viable energy source. The intricacies of energy-related issues have far-reaching consequences, affecting not only domestic industries but also playing a pivotal role in determining the competitiveness of Pakistani exports on the global stage.

Recently, the All Pakistan Textile Mills Association (APTMA) issued a stark warning to the Special Investment Facilitation Council (SIFC), signaling the imminent threat of further declines in exports due to the lack of a financially viable energy source for the industry. This predicament, rooted in economic principles, was destined to surface as a depreciating rupee and escalating energy costs reached unsustainable levels, impacting manufacturing and global competitiveness.

To understand the severity of the situation, it’s crucial to examine the context. The export sector had previously enjoyed regionally competitive energy tariffs in 2021-22. This favorable situation resulted in a remarkable 54 percent growth in textile and apparel exports, surging from $12.5 billion in FY20 to an impressive $19.3 billion in FY22. However, the optimism was short-lived as power tariffs for export firms surged, causing a contraction in textile and apparel exports to $16.5 billion in FY23.

The current state of affairs reveals that tariffs for industrial consumers have now escalated. This surge is attributed to quarterly tariff adjustments (QTA) prompted by declining power consumption, a fuel price adjustment (FPA) of Rs7.056/kWh for January 2024, and the anticipation of higher QTAs in subsequent quarters due to the ongoing reduction in power consumption.

These tariffs now stand at more than double the average faced by similar industries in competing regional economies, such as Bangladesh (8.6 cents/kWh), India (average 10.3 cents/kWh), and Vietnam (7.2 cents/kWh). Understandably, production becomes financially unfeasible at these elevated rates. Adding to the industry’s woes, gas prices for industrial consumers have skyrocketed by a staggering 223 percent since January 2023. This surge has obliterated the financial viability of captive generation, a method widely relied upon by a significant portion of the industry in the absence of competitively priced grid electricity. Consequently, textile and apparel exports are now stagnant at around $1.4 billion per month, significantly below their installed capacity of $2 billion per month.

In response to these challenges, the APTMA has presented a comprehensive set of recommendations to the SIFC. The proposals include the removal of cross-subsidies on non-productive sectors of the economy and the operationalization of the Competitive Trading Bilateral Contracts Market. The latter aims to facilitate business-to-business (B2B) power contracts at a Use of System/Power Charge of 1-1.5 cents/kWh, excluding cross-subsidies and stranded costs. The overarching goal is to empower the industry to procure green energy at competitive end-use prices through captive generation from sources like geothermal plants in depleted oilfields, hybrid solar/wind plants, or other green power producers.

While these recommendations hold promise, their successful implementation rests on the collaboration between the SIFC and the finance ministry, especially considering the constraints imposed by the International Monetary Fund (IMF) program. The urgency of finding solutions to this pressing issue cannot be overstated. The looming threat to the textile industry’s competitiveness in the international market necessitates immediate attention to avoid dire consequences for export revenue and the overall reform process. The forthcoming weeks and months are poised to unfold critical discussions and decisions in the pursuit of resolving this complex and urgent crisis.

The country has grappled with persistent issues such as power shortages, blackouts, and an overall energy deficit. This predicament has posed a formidable obstacle for industries reliant on consistent and affordable power, hindering their ability to meet production targets and fulfill export demands.

The significance of a reliable energy source for Pakistani exports cannot be overstated. Industries, especially those involved in manufacturing and processing, are heavily reliant on continuous power supply to maintain seamless operations. Uninterrupted energy supply is not only crucial for meeting production schedules but is also a determining factor in the quality and consistency of goods produced for the export market.

The repercussions of the energy deficit resonate deeply across various sectors contributing to Pakistani exports. Industries such as textiles, garments, and manufacturing, which form the backbone of the country’s export portfolio, find themselves at a disadvantage when grappling with erratic power supply. Meeting international standards for quality and timely delivery becomes a challenging task, ultimately affecting the competitiveness of Pakistani products in global markets.

The energy-related challenges are particularly acute for industries engaged in perishable goods and time-sensitive manufacturing processes. In such cases, even a brief interruption in power supply can result in substantial losses, affecting not only the economic viability of individual businesses but also denting the overall reputation of Pakistani exports.

Several factors contribute to Pakistan’s ongoing energy crisis. Aging infrastructure, insufficient investment in the power sector, and the circular debt issue have collectively led to a situation where the demand for energy consistently outpaces the available supply. The overreliance on non-renewable energy sources and the lag in adopting sustainable alternatives have further exacerbated the problem.

The circular debt issue, characterized by a vicious cycle of non-payment and delayed payments in the energy sector, has resulted in financial constraints for power producers. This, in turn, hampers their ability to invest in infrastructure upgrades and maintain a consistent energy supply. Addressing these root causes is imperative for the sustainable resolution of Pakistan’s energy challenges.

To bolster Pakistani exports and enhance the competitiveness of its industries, a multipronged strategy is needed to address the energy conundrum. The government must prioritize substantial investments in upgrading and expanding the energy infrastructure. This includes modernizing power plants, incorporating renewable energy sources, and implementing smart grid technologies to improve the efficiency of energy distribution.

Moreover, fostering a conducive environment for private sector participation in the energy sector can catalyze innovation and efficiency improvements. Encouraging the development and adoption of renewable energy solutions, such as solar and wind power, can not only mitigate the current energy deficit but also align Pakistan with global sustainability goals.

Pakistan’s quest for a viable energy source requires collaboration on the international stage. Engaging with foreign investors, technology providers, and international organizations can bring in the expertise and financial support needed to revamp the energy sector. Multilateral initiatives, partnerships, and funding mechanisms can play a pivotal role in supporting large-scale energy projects that align with Pakistan’s economic and environmental objectives.

In conclusion, the quest for a viable energy source is undeniably the most pressing challenge for Pakistani exports. The current energy deficit not only hampers the day-to-day operations of industries but also impedes the nation’s ability to compete in the global marketplace. Addressing this issue requires a comprehensive strategy that encompasses infrastructure upgrades, adoption of renewable energy sources, and collaboration with international partners.

The resolution of Pakistan’s energy challenges holds the key to unlocking the full potential of its export-oriented industries. It is not merely a matter of economic development but a crucial step towards establishing the country as a reliable and competitive player in the global market. The path forward necessitates decisive action, strategic investments, and a commitment to sustainable practices, laying the foundation for a brighter economic future for Pakistan and its export-driven industries.