Energy subsidies cripple Pakistan economy, says study

Energy subsidies in Pakistan are contributing to “severe supply problems” according to a report from the country’s Petroleum Institute.

Power consumption has grown by 80% over the last 15 years, but a failure to keep up with demand has led to crippling electricity shortfalls.

Pakistan spent nearly $3.5 billion subsidising the power sector in the fiscal year ending in June, and the artificially low price of natural gas is creating a problem with supplies. Subsidies contribute to inflated demand and gas now accounts for over 45% of Pakistan’s domestic energy needs.

The Institute warns that unless the government allows gas prices to rise – they are presently cheaper than alternative fuels – supply will decline from 4 billion cubic feet per day to less then 1 billion cubic feet by 2026.

The logic of energy subsidies in the developing world is to lower the costs of power for the poor. However, in January, the IMF warned Islamabad that its energy policy was “inefficient and untargeted” as subsidies were being cornered by large companies and the wealthiest sectors of society.

In addition to this danger of ‘free-riding’, there is also the problem of gas theft. This can take the form of pipeline vandalism or tampering with meters. This burden increased the subsidy budget by $950 million during the current fiscal year.

Government controlled prices are a “significant disincentive in attracting new gas supplies, either through increased domestic exploration activities or regional gas pipeline imports” said the report.

The Petroleum Institute recommends the creation of a “competitive gas market with deregulated prices and open-access to distribution grids for third-party suppliers”. However, at a time when industry is suffering from persistent power shortages, any rise in the cost of gas is likely to harm economic activity.

Once embedded, subsidies are often difficult to abolish. For Pakistan, the political implications of raising the cost of gas in the midst of an ‘energy crisis’ are particularly acute. Earlier this month, Islamabad postponed a cabinet decision on whether to raise rates at anything between 15 to 96 per cent. The government is focusing attention on clamping down on theft rather than cutting subsidies.

Pakistan’s over reliance on cheap fuel is compounded by the failure to discover new gas and oil fields; indigenous supplies of the two commodities are forecast to be exhausted by 2025 and 2030 respectively. Security concerns have also deterred foreign investment in the country’s energy sector.