PRO 12-04-2012_Layout 1 4/12/2012 12:24 AM Page 1
Agriculture can farm out economy Page 02
profit.com.pk
Thursday, 12 April, 2012
DUH!
ADB’s revelation of the decade Unveils persistent energy crisis as major hurdle in Pakistan’s economic growth g Load-shedding, high inflation, security issues also among bank’s ‘earth-shattering’ revelations g Unearths power crisis plan to tame aforementioned menaces g
ISLAMABAD
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AMER SIAL
he Asian Development Bank (ADB) has said that Pakistan’s economy faces a major hurdle in the shape of its persistent domestic energy crisis, as the loadshedding intensifies losses arising from power and gas shortages held down GDP growth by 3 to 4 percentage points in FY2011 and FY2012. The bank’s flagship annual economic publication, Asian Development Outlook 2012 released on Wednesday says identifies rising inflation, decline in investment, low tax revenue and losses at public-sector enterprises as other factors hindering economic growth. Beyond the immediate fiscal and energy improvement steps, the country needs clear business plans to boost the economy, in particular manufacturing and infrastructure development, to sustain growth and generate jobs. The economy continues to be affected by structural problems, including a domestic energy crisis, a precipitous decline in investment, persistently high inflation, and security issues. Budget deficits remain high, driven by substantial subsidies and losses at state-owned enterprises, and tax revenue below target, says the report. The ADB sees power as the main constraint for economic growth, stressing for better load-management to minimize commercial losses. The country’s Planning Commission estimates that losses arising from power and gas shortages held down GDP growth by 3 to 4 percentage points in FY2011 and FY2012. Improved management of power resources could ameliorate predictability of loadshedding to allow the private sector to better schedule work and minimize costs. For every unit of power sold, there is a loss to the sector reflected in the form of subsidies. An outstanding accumulation of Rs 220 billion was carried into FY2012, and an additional financ-
ing of 1 to1.5 percent of GDP is likely to be required in FY2012. The report advises reforms in not only the energy sector but also state-owned enterprises, naming Pakistan Railways, Pakistan International Airlines (PIA), and Pakistan Steel Mills as entities suffering the steepest of losses. The challenge of improving efficiency and putting these enterprises on a viable commercial footing is formidable. Reforms are needed, including a separation of these enterprises from operational interference by government ministries,” advises the bank. The slow growth in recent years was exacerbated by widespread floods in FY2011. Unless progress can be made in resolving these fundamental problems, the growth outlook will stay modest. The report says Pakistan’s economic outlook is expected to stay modest as its growth during fiscal year 2012 would hover around 3.6 percent. It says Federal Board of Revenue (FBR) collections are much improved, running a full 33 percent ahead of last year’s performance for the first 6 months. This reflects improved economic activity in the first half of the year, as well as extension of the flood-related tax surcharges and improvements to tax administration. Yet meeting the overall revenue target for FY2012 in part depends on the sale of third-generation telecoms licenses in the latter part FY2012-a sale already rescheduled over the past 2 years. The external accounts returns to deficit, with scant cushion from the financial and capital accounts. Lower prices for key export commodities, particularly cotton, combined with higher import prices, pushed the current account from near balance for the first 7 months of FY2011 to a deficit of to a deficit of $26 billion (1.8 percent of GDP) by end-January 2012. Workers’ remittances expanded by 23.4 percent during July 2011- February 2012, slightly slower than the pace for the same period a year earlier. however, the economy will remain exposed to balance of payment
NITROGENOUS NARRATIONS
Urea scam # 2186 Ministry of industries vies to ensure $282 m go kaput n NDFC feels importing fertiliser is idiocy n Urea is also being touted as the latest weapon in govt’s politicising arsenal
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LAHORE IMRAN ADNAN
he Ministry of Industries has once again made a recipe to drain around $282 million in urea imports, which is hovering around $450 per ton in international markets. The ministry has proposed the government to import 600,000 tons of urea, whereas the National Fertiliser Development Centre (NDFC) believes that currently, there is no need to import fertiliser in the country. The ‘NDFC Urea Outlook for Kharif 2012’ indicates that the kharif season is expected to begin with 0.851 million tons of opening inventory. Total available urea would be about 3.551 million tons, which will
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pressure in the current international environment and subdued growth in other Asian countries, says the report. MULTIYEAR POWER CRISIS PLAN : Noting with concern that the persistent power crisis in Pakistan is a major constraint for economic growth, the Asian Development Bank (ADB) has suggested implementing a multiyear plan with solid support from stakeholders and consumers for a sustainable and reliable power sector in the country. The banks Asian Development Outlook report says power is the main constraint for economic growth, as load-shedding intensifies and becomes less predictable. The power shortage is the main factor constraining economic growth. The supply-demand gap at peak hours reached over 5,000 megawatts (MW) in FY2011. This reduced economic output, hitting manufacturing the hardest. The current system, with tariff and collections below cost recovery, is a major deterrent to investment for capacity expansion in the sector. Cost recovery has not yet been achieved despite substantial increases in tariffs over the past 2 years, and measures to bring down costs have not been effective. For every unit of power sold, there is a loss to the sector reflected in the form of subsidies or accumulation of losses in the state owned power companies. An outstanding accumulation of Rs 220 billion was carried into FY2012, and an additional financing of 1 to1.5 percent of GDP is likely to be required in FY2012. The cause of the power sector crisis can be divided into three pillars: cost-efficient generation capacity not keeping up with demand, financial issues, and management issues. The supply–demand gap has widened because of a lack of investment in energy. The government has in fact added 1,604 MW to the system by commissioning six new independent power producers of 1,264 MW and a nuclear power plant of 340 MW. however, other domestic resources hydro, gas, and coal have not grown
include 2.70 million tons of domestic production – subject to normal availability of gas to urea manufacturing plants. NDFC estimates that total urea off-take would be around 3.20 million tons leaving behind 351,000 tons of inventory for the next Rabi crop 2012-13. Industry experts estimate that the C&F price of imported urea is around $470 per ton that means it would land in the country at Rs2,397 per 50 kg bag, inclusive of 12 per cent landed cost. They point out that if the government sell the imported urea at Rs1,600 per bag, it will have to bear an additional subsidy of approximately Rs12 billion. They underscores that it will merely a wastage of foreign exchange and taxpayers money as it will never benefit farmers, only middlemen and profiteers will fill their pockets in connivance with state machinery. They pointed out that as much as 0.8 million tons of urea was carried forward from Rabi season to Kharif season that started from April 1. They further disclosed that four fertiliser plants on Mari Network are working at around 88 per cent of their capacity, while the SNGPL-based fertiliser plants are also operational since March 6, which means that country can produce the required amount of urea for domestic consumption without spending precious foreign exchange and also without giving away approximately Rs12 billion unnecessary subsidy. Fertiliser industry sources allege that the government is trying to import urea to take political advantage as it did in the Rabi season by distributing imported urea through hand-picked politically influential middlemen, as well as to make good
enough to cover demand, thereby increasing reliance on imported fuel oil. The energy mix has changed from predominantly hydro to thermal, which consists of domestic gas and imported fuel oil. Industrial, retail, and fertilizer users are competing for the depleting gas supply, the preferred fuel for existing thermal plants. Plans to increase domestic gas production, import liquefied natural gas, pipe gas from neighboring countries, or bring in electricity from Central Asia have yet to materialize. Financial issues are rooted in the fact that the cost recovery tariff determined by the National electric Power Regulatory Authority is not applied to customers. Thus the government bears the differential as a subsidy. Losses and costs excluded from the tariff formula also accumulate at the public sector company level. The lack of financing leads to arrears for the power generation and fuel companies. Timely payment to these companies, essential for the sector’s reliability, has become increasingly difficult, partly because of increased dependence on imported fuel, which is subject to wide price fluctuations. The cost of oil-based power generation in the country escalated by almost 40 percent in the 2 fiscal years ending FY2011. Despite steep increases in tariff and fuel price adjustments, customer tariffs remain below cost recovery, requiring large government subsidies to keep the system operating. The focus on massively increasing spending on power subsidies, reforms, and efficiency measures has been unable to remedy the accumulation of arrears in the system. To improve management, the government has appointed independent boards for the public power companies to select chief executive officers for these companies. efforts are also ongoing to decrease commercial and technical losses around 20 percent. however, these efforts have been overshadowed by the increase in costs and unwillingness of some customers to pay the higher tariffs.
amount of money for upcoming elections. They said that the whole strategy is being prepared on the pretext of benefiting farmers, but in fact small farmers would not even a single bag. Industry leaders lament that despite the fact the Pakistan is the seventh largest urea producing country with manufacturing capacity of 6.9 million tons, the country had to spend $783 million on urea imports in 2011. In addition, the country had to pay Rs54 billion on account of fertiliser subsidy. They term year 2011 as the worst year in the history of domestic urea industry as all manufacturing units could hardly produce 4.9 million tons of urea against
COmmENT
Circular debt and bank financing
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NLY those with their heads buried in the sand would’ve been seriously surprised by banks refusing lending for power projects till the circular debt is resolved. And there shouldn’t be room for ostriches in policy-making circles. Yet surprise is in plenty in Islamabad, and dejection that the no-credit posture extends to all things energy, including the coal goldmine sitting dormant at Thar. So, as things stand, not only are there not nearly enough monies to resolve the debt matter, there will be none flowing in either. And since debt banks on money-flow, it’s not going to be resolved for some time to come. Normally, it’d surprise us that banks have finally begun taking risk management seriously, seeing how their generally risk-averse nature has facilitated excessive government borrowing, crowding out private sector investment in the process. But it turns out that power sector exposure is at the centre of their risk fiasco, and there is simply no way any financial organisation anywhere in the world will engage with the same sector till all outstanding financial matters are cleared. So the responsibility falls right back on the government. They can claim inheriting energy problems from the previous administration, a partly true claim, but so much more false than true that bringing it up can at best be face-saving desperation. But they cannot justify kicking the circular debt can down the road all their years in office. And as regards Thar, the president’s recent public lament regarding necessary investment notwithstanding, offers from China and Japan went begging primarily because Islamabad couldn’t get its act together in time. In a way it’s good that banks have named the debt as the principal obstacle to future financing. Now the government will need to move with greater agility and stronger purpose than before. Whether or not it is up to the task will become apparent soon enough.
the installed capacity of 6.9 million tons due to mismanagement in the energy sector and unannounced gas curtailment. The SNGPL-based fertiliser plants were badly hit as they could scarcely achieve 31 per cent of fertiliser production against their installed capacity, they maintained. Despite urea imports and heavy subsidies urea consumption dropped significantly during the Rabi season 2011-12 (October-February. NDFC data shows that total fertiliser nutrient off-take during Rabi 2011-12 was about 1.596 million tons, which decreased by 18.9 per cent compared with same timeframe of previous Rabi season.