FeaturedNationalVOLUME 19 ISSUE # 34

Mounting costs and potential protests

Another cycle of nationwide protests and agitation against the soaring electricity costs seems imminent. The National Electric Power Regulatory Authority (Nepra) has announced plans to extract an additional Rs700 billion from consumers through a revised electricity tariff, effective from the first of this month.

This tariff adjustment is deemed a ‘necessary measure’ to fulfill revenue requirements stipulated by the International Monetary Fund (IMF) for Pakistan to qualify for yet another bailout package. Consequently, the per-unit price of electricity is set to increase by an average of Rs5.72 for the next year, raising the base tariff to Rs35.50 per unit from the current Rs29.78. However, the actual applicable rate per unit will range between Rs65 and Rs72, as customers will also be charged surcharges, taxes, duties, and levies, along with monthly and quarterly adjustments. These changes will start impacting consumers later this month, with the poorest expected to see their bills rise by as much as 51%.

A nationwide, prolonged heatwave over most of June and early July likely necessitated increased electricity usage, making the higher tariff a double burden for households that were not mindful of their consumption. The pressing question is whether the majority of households have enough financial flexibility to absorb this impact. Given the current economic climate, it is unlikely. Wage growth has significantly lagged behind inflation recently, and due to stagnant economic growth, most households have consistently lost purchasing power over the past few years. This trend is evident from the sharp decline in electricity consumption.

Electricity charges need not be so exorbitant: while the government may struggle to avoid capacity charges, reducing theft and line losses remains a sensible approach to lowering prices. However, successive governments have shown little interest in enforcing stricter regulations, leaving consumers to bear the cost. Last year, the protests eventually subsided; the question this year is whether the public has reached a breaking point or if there is still room to endure the consequences of policy failures.

Additionally, Nepra has notified an extra Rs3.33 per unit fuel cost adjustment (FCA) for May consumption, allowing ex-Wapda distribution companies (Discos) to raise an additional Rs41 billion in July. The net increase for consumers of Discos will range from Rs11 to Rs14 per unit this month, considering the base tariff hike of Rs5.75 to Rs7.12 per unit already sanctioned by the cabinet. The Rs3.33 per unit additional Fuel Cost Adjustment (FCA) will effectively translate to Rs5.50 per unit due to a partial spillover into the forthcoming quarterly adjustment. This will trigger a fresh wave of inflation, which is already intolerable for most Pakistanis. The increased cost of electricity will force many families to make difficult choices regarding their daily energy consumption. Basic activities and running essential appliances will become more expensive, leading some households to cut back on their usage. This reduction in energy consumption could affect the quality of life, as families may have to forgo comforts and conveniences they once took for granted.

Small businesses, which often operate on tight margins, will also feel the pinch of higher electricity costs. For businesses reliant on electric machinery, refrigeration, or extensive lighting, the increased tariffs could lead to higher operating expenses. These costs may be passed on to consumers in the form of higher prices for goods and services, further exacerbating the financial strain on the common people.

The hike in power tariffs is likely to contribute to overall inflation, compounding the existing economic challenges faced by the country. As the cost of electricity rises, so too will the costs of production and transportation for various goods, leading to higher prices across the board. This inflationary pressure can reduce consumer spending, slow economic growth, and increase the risk of social unrest as people grapple with the rising cost of living.

Short-term inflation, as measured by the Sensitive Price Index (SPI), surged for the fifth consecutive week owing to tax measures implemented in the budget, which escalated the cost of living, according to official data.

The SPI-based inflation rose 23.59% year-on-year for the week ending July 4. On a week-on-week basis, it increased by 1.28%. The PML-N government’s decision to permit sugar exports has led to a sharp rise in domestic sugar prices nationwide. Several indirect taxes imposed through the Finance Act 2024 since July 1 have further exacerbated inflation. The costs of pharmaceuticals, stationery, and poultry products have escalated following the imposition of a sales tax on these items in the recent budget.

Additionally, the government has reversed the downward trend in petroleum product prices, increasing petrol and diesel rates from July 1. The significant rise in non-food prices has driven both short-term and monthly inflation higher.

The hike in sales tax and customs duty on fresh vegetables and fruits imported from Iran and Afghanistan has also contributed to food inflation. Weekly inflation hit a record 48.35% year-on-year in early May 2023 but then decelerated to as low as 24.4% in late August 2023 before surging past 40% during the week ending on November 16, 2023. The SPI stood at 318.61 compared to 314.57 the preceding week and 257.79 a year ago.

The index, which comprises 51 items collected from 50 markets in 17 cities, is computed weekly to monitor the prices of essential commodities and services at shorter intervals. Data showed that the prices of 29 items increased, 5 items decreased, and 17 items remained stable compared to the previous week.

As the cost of living continues to soar, driven by rising electricity tariffs and an array of indirect taxes, Pakistani households are poised to face unprecedented economic strain. The looming wave of inflation threatens to exacerbate the financial burden on the already struggling population, raising critical questions about the sustainability of current economic policies and the potential for widespread social unrest. The need for effective measures to mitigate these impacts has never been more urgent.