Will higher priced energy keep Pakistan going?

The Pakistan government is expected to increase gas prices yet again, potentially by over 40 percent during February, a move that is part of the conditions of the ongoing program with the International Monetary Fund (IMF). This decision, the second fuel cost hike since November, is said to be crucial to address the escalating issue of circular debt in the gas sector, which reached PKR 2.1 trillion, or 2.5 percent of the GDP, by the end of June 2023. 

State-owned gas distribution companies, including Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company (SSGC), are expected to implement these price increases, with SNGPL potentially raising prices by 41 percent, aiming to generate additional revenue to cover a significant shortfall.

The potential increase in gas prices is expected to differ across consumer sectors, including residential, commercial, and industrial, due to existing government subsidies for residential users and fertilizer manufacturers. In contrast, commercial and industrial consumers, like CNG fuel stations, face elevated tariffs under the current cross-subsidy formula.

In any case, consumers are all set to brace higher inflation and rising cost of doing business and for manufacturing industries, input costs will escalate. This also has implications for Pakistan’s manufacturing and export sector competitiveness which is already threatened due to a rise in the unit value of imports as the exchange rate appreciates. 

New supplies of gas including own exploration and regional agreements like the Iran-Pakistan, and Tajikistan-Afghanistan-Pakistan gas pipeline haven’t progressed at the pace earlier anticipated. 

Dr. Vaqar Ahmed

It is important for laypersons to understand the underlying problem: The ever-growing circular debt cripples gas companies, hindering infrastructure investment and service delivery. The frequent price changes create uncertainty for consumers and businesses, hampering long-term planning and investment decisions. Extensive cross-subsidies distort pricing, burdening the government and failing to reach the most deserving effectively. Dependence on imported gas exposes the sector to volatile global energy markets and currency fluctuations. 

Then on top of this, there is leakage and theft — unaccounted for gas losses that are costing Pakistan billions annually and impacting supply. New supplies of gas including own exploration and regional agreements like the Iran-Pakistan, and Tajikistan-Afghanistan-Pakistan gas pipeline haven’t progressed at the pace earlier anticipated. 

On the supply side, despite several interventions, gas companies suffer from outdated infrastructure, poor governance, and operational inefficiencies, leading to high costs and service disruptions. The lack of competition in the gas sector stifles competitiveness and discourages efficient management practices. Even the handling of imported gas is often termed inefficient and only adds to the financial burden. 

Pakistan has agreed with the IMF on some reforms that could lead to reduction in supplying gas to consumers (including the already accumulated debt). The government had increased natural gas tariffs in November last year maintaining a progressive rate structure for households. The rate for protected households remained unchanged. These households in fact, account for 60 percent of gas meters. 

It’s bad news for businesses as there were large increases for non-household consumers and higher rates for industrial captive power users. In the medium term too, IMF agrees with the government that the protection of the lifeline consumers may continue and could be ideally replaced by a targeted income support program.

The role of Pakistan’s Oil and Gas Regulatory Authority (OGRA) is critical so that gas supplies may be channeled to the most efficient gas-based power plants in line with the merit order principle. The authority oversees more than two-thirds of the nation’s energy domain. The authority’s mission to promote competition, facilitate investments, and safeguard stakeholder interests in the gas sector are yet to materialize. To benefit from the stable energy prices globally, more innovative thinking has to come from the authority to curb energy price inflation. Besides, other areas that require attention from the authority include consumer protection – evaluation of the consumer affairs department and regional offices is long overdue, as well as the rigorous enforcement of technical and safety standards.

– Dr. Vaqar Ahmed is an economist and former civil servant.