Prime Minister Imran Khan has announced a huge relief package for the industrial sector, which will not only jumpstart the economy, but also help provide jobs to millions of people. However, it may also worsen the circular debt problem, as incentives have been announced without making reforms in the power sector.
The package reflects an out-of-the-box approach to promote small and medium enterprises, which were the hardest hit by the pandemic and required urgent measures to revive. The package will provide additional consumption of electricity at 50pc less than the prevalent rate which would encourage small and medium enterprises to increase production, create jobs and generate more revenues for themselves and the country. According to the plan, if an SME was purchasing electricity at Rs16 per unit last year, then the cost of purchasing additional electricity (what was purchased last year) from November onwards would be Rs8 per unit. And over the next three years, till the end of the tenure of the present government, large scale manufacturing units (LSM) and SMEs would pay 25pc less on consumption of additional electricity.
Under the package, industries will get 50pc relief in electricity tariff from November till June next year. Industrial units will also get electricity at 25pc reduced rates with no peak hour. Despite the ongoing second wave of Covid-19 in the country, the government announced that no industry would be locked down. Small and medium industries will get 25pc relief in the electricity bill which is a major decision taken by the government. High tariff was charged from industries during the peak hours from 7pm to 11pm, which was why they could not hold second or third shifts to enhance production. The package aims to increase industrial growth and production, boost the economy and provide more job opportunities. It would promote industries in the country that have suffered losses in the past due to high costs of electricity.
After the cabinet approved the package, Prime Minister Imran Khan said,” A strong infrastructure of energy is vital to help industries grow and compete in the international market. With 25pc expensive electricity rates, Pakistan lagged behind India and Bangladesh in terms of exports, therefore, it is extremely important for the country to strengthen its industries as it will lead to wealth creation and help pay off debt.” According to estimates, there are 3.3 million SMEs in Pakistan, including manufacturing units and service providers, which employ over 78pc of non-agricultural labour, account for 25pc of exports and 30pc of Gross Domestic Product (GDP). Studies show that major issues facing the SMEs were power shortages, unscheduled outages and high electricity tariffs. Experts say a reduction in tariff, a major input cost for most LSMs and SMEs, would provide the necessary impetus to raise output, exports, GDP and raise the revenue of the government.
In April, the government announced a package of incentives for the construction sector to restart economic activities. However, the incentives largely remained unutilised and failed to produce desired results. Earlier, taxes on main exports had been slashed in hope to give the economy a boost and narrow the trade deficit but to no avail. At a time when the country was facing an increasing threat of the deadly coronavirus, Prime Minister Imran Khan announced a set of incentives for people investing in the construction sector and promised to open allied industries to strike a balance between economic activities and efforts to contain the pandemic. Giving the status of “industry” to the construction sector, Prime Minister Imran Khan unveiled the relief package, under which those investing this year were not required to disclose their sources of income. A fixed tax was levied on construction activities under the package while 90pc taxes were waived on the construction of houses under the Naya Pakistan Housing Programme. Also, the capital gain tax on the sale and purchase of property was withdrawn. All construction material, except steel and cement, were exempted from the withholding tax. However, the package failed to produce desired results.
The government will have to make sure the new package does not meet the fate of its incentives to the construction sector. The new package has been announced at a time when the energy sector’s circular debt has reached Rs2.3 trillion against Rs1.2 trillion inherited by the government. It means the circular debt has risen by nearly 92pc in two years. The circular debt grew at an average rate of about Rs1.5b per day (Rs45b a month) in 2019-20. The National Electric Power Regulatory Authority, in its “State of the Industry Report 2020”, said the circular debt had reached Rs2.15tr by June from Rs1.6tr in June 2019. The report said that Covid-19-related issues also contributed to the rise in the debt as the pandemic led to an increase in theft of electricity and non-payment of bills. The NEPRA said that one of the main causes of theft of electricity and non-payment of power bills was higher tariff.
It is a fact that contracts signed with power generation companies by the previous governments resulted in production of expensive electricity, which is unaffordable for the industrial sector. During 2013-18, the country’s exports dipped from $25 billion to $20 billion, with many industries shutting down due to high electricity bills.
Few weeks ago, the government announced renegotiating power purchase agreements with the independent power producers (IPPs). However, it has failed to announce new rates. According to the government, power is 25pc costlier in Pakistan than India and Bangladesh. It should immediately cut the power tariff for all consumers to provide relief to the common man.