FeaturedNationalVOLUME 18 ISSUE # 41

Tougher times on the horizon

Power and fuel prices in Pakistan have surged to an unprecedented peak, causing significant challenges for the general populace. The cost of living has soared, surpassing the means of ordinary individuals. There are concerns that inflation could escalate even more due to anticipated additional increases in power, fuel, and commodity prices, a consequence of recent actions and the declining value of the local currency against the US dollar.

Recent data sheds light on key economic trends in Pakistan, ranging from inflationary pressures and currency depreciation to challenges in the power sector. These numbers reflect the intricate interplay of domestic and global factors, presenting a snapshot of the country’s current economic landscape. Official data indicated a 25.34 percent year-on-year increase in short-term inflation for the week ending on August 25. This surge was primarily attributed to elevated prices of kitchen items. Nonetheless, this increase was a deceleration from the previous week’s 27.57 percent. On a week-on-week basis, the Sensitive Price Index (SPI), which measures weekly inflation, rose by 0.05 percent, marking an upward trend for the fifth consecutive week.

Among the 51 items in the SPI basket, the prices of 22 goods experienced a significant rise, while 12 items saw a decline, and 17 remained unchanged compared to the preceding week.

The Pakistani rupee continued to face downward pressure, showing a negative trajectory against the US dollar in both interbank and open markets. In intraday trading, the US dollar reached its highest historical level against the Pakistani rupee. On the last working day of the week, the PKR hit an all-time low against the USD, losing 78 paisas in the interbank market. Over recent weeks, the Pakistani rupee depreciated by approximately Rs12 against the USD. Despite efforts, the central bank expressed its inability to stabilize the currency market. Conversely, the US dollar remained steady at Rs316. The USD has risen by Rs20 in the open market since the caretaker government assumed control. The rupee’s ongoing pressure was linked to the government’s pursuit of building market confidence to achieve stability and economic improvement.

The caretaker government imposed a significant increase in petroleum product prices earlier this month, impacting inflation for the already burdened populace. Unfortunately, this might not be the end of the challenges, as officials hinted at another potential hike in petroleum prices. With the Pakistani currency crossing the 300 mark against the USD in the interbank market due to continuous depreciation linked to import restrictions being lifted, petrol prices were anticipated to rise. Inflation was expected to increase for all commodities, including food prices. The impending fortnightly review was likely to bring a substantial increase in petroleum prices in Pakistan due to the currency’s volatility.

Globally, oil prices remained relatively stable. In Pakistan, petrol prices have already climbed by Rs37.50 per liter, and diesel prices by Rs40 per liter in recent weeks. With the country grappling with crises, petroleum and POL product prices were expected to rise by double digits. This increase, along with a recent shock in power tariffs, added to the concerns of various segments of society, particularly the salaried class, already burdened by the economic downturn.

In the first month of the current fiscal year, remittances to Pakistan decreased by 19.3 percent year-on-year, amounting to $2 billion. Additionally, on a month-on-month basis, remittance inflows decreased by 7.3 percent. In July, the country received $2.2 billion in remittances from overseas Pakistanis.

Power consumers are bracing themselves for a further increase of Rs2.07 per unit in electricity tariffs due to fuel charge adjustments for July 2023. The Central Power Purchasing Agency-Guarantee (CPPA-G), representing power distribution companies, sought a price hike of Rs2.0703 per kilowatt-hour (kWh) above the reference fuel cost of Rs6.8935 per kWh. The average electricity price for the month was Rs8.9638 per unit. During July, power companies generated electricity at the highest cost. Furnace oil-based plants produced electricity at Rs28.7 per unit. However, the contribution of furnace oil-fired electricity to the energy mix was only 1.98 percent. Electricity generated from imported liquefied natural gas (LNG) was priced at Rs24.4 per unit, constituting 19.6 percent of total power generation. The cost of electricity import from Iran doubled to Rs23.6 per unit compared to its past rate of Rs10 per unit. Its contribution to the energy supply was 0.19 percent.

The cost of electricity generation from indigenous gas also increased significantly, rising over 100 percent from around Rs5 per unit to Rs13.6 per unit. Its share in energy supply was 7.6 percent. Coal-based electricity cost Rs11.5 per unit and contributed 14.69 percent to the energy supply. Hydroelectric power had the largest share at 37.18 percent, while the cheapest electricity was generated from nuclear power plants at a cost of Rs1.16 per unit, making up 14.2 percent of the energy supply.

As Pakistan navigates through these economic challenges, it faces a complex web of factors that influence its inflation, currency value, and power sector. Mitigating these issues will demand a strategic approach, involving careful policy interventions, prudent fiscal management, and efforts to enhance domestic production. A balanced response is essential to stabilize the economy, boost investor confidence, and improve the lives of citizens.