Razeen Ahmed and Nadir Mumtaz

An analysis has been made of one of the factors which is a significant constituent of the costs involved in exports of Pakistan. This significant factor is electricity and cost of its generation. Pakistan relies heavily on thermal sources for its electricity and a high cost of electricity will negatively impact upon the competitiveness of exports whether it be in goods or services. The current account (external) deficit is the foremost economic challenge confronting Pakistan and may wipe out gains from development which has taken place in the country in the last five years in terms of infrastructure and the much flaunted investment in the China Pakistan Economic Corridor (CPEC).

Global gasoline prices

The average price of gasoline or motor spirit (MS) as known in Pakistan is $ 1.07 per litre in the world. However, there is substantial difference in the prices among countries. Generally, richer countries have higher prices while poorer countries and the countries that produce and export oil have significantly lower prices. One notable exception is the US which despite being an economically advanced country has low gas prices. The difference in prices across countries is attributed to various taxes and subsidies for MS. All countries have access to the same petroleum prices prevailing in international market but impose different taxes.i

As of 30th October 2017, the range of price of MS per liter in US dollar is as follows: the US 0.73, the UK 1.56, Bangladesh 1.07, Indonesia 0.63, India 1.12, Iran 0.34, Pakistan 0.71, Japan 1.17, Saudi Arabia 0.24, South Korea 1.42 and Venezuela 0.01

Fuel import costs globally

China is the world’s second-largest importer of oil at $ 116 billion after the US. India’s crude oil import bill is $ 112.7 billion in the financial year 2014-15 and $ 64 billion in 2015-16. Japan’s crude oil imports were around $ 50.8 billion during the year 2016, Thailand $ 15.2, Singapore $ 15.1, South Korea $ 44.2, Indonesia $ 8.1, Malaysia $ 3.3ii. The State Bank of Pakistan reported that in the FY 2016, the oil import bill was $ 7.667 billion as compared to $ 12.166 billion in the FY 2015 whereas it was as high as $ 14.77 billion in FY 2014.

Electricity generation through oil

In the FY 2011-12, electricity generation through oil (furnace and high-speed diesel) in Pakistan was 35% followed by hydro at 29.9% and gas at 29%.iii During the FY2014-15, the total energy generated in the country was 109,059GWh of which the share of thermal electricity generation was 69,988GWh (64.17%), hydel power plants 30.24%, nuclear power plants 4.90% and wind power plant 0.27%. The increasing share of thermal electricity generation increased the utilities’ financial burden particularly in foreign exchange.iv The source-wise fuel cost (Rs/kWh) of furnace oil, high-speed diesel (HSD), gas and coal was Rs 12.54, Rs 17.14, Rs 4.81, and Rs 4.50, respectively, for the FY 2014-15. The unit cost of energy on furnace oil reduced by Rs 3.43 per kWh from the FY 2013-14. Similarly, the cost of generation on HSD which provided 3.01% of total generation reduced by Rs 4.71 from 2013-14. The cost of generation on gas remained almost the same. An overall impact of the reduction in cost of generation of electricity has been noted as Rs 87.97 billion during the FY 2014-15 as compared to the preceding financial year which is attributable to a reduction in oil prices in the international market.

In China, 45% of electricity is generated through coal-fired plants.v In India, coal is used as a major component of power generation and 71% of electricity is generated through the coal. vi Interestingly, in the US electricity generated through natural gas, coal, nuclear and hydro is 33.8%, 30.4%, 19.7%, 6.5%, respectively.vii

Rising oil import bill and exports

The decline in remittances is being explained at the official level as global economic conditions are not supportive, including a reversal in international commodity prices (especially palm oil), which inflated food imports as well as the impact of cuts in infrastructure spending and labour indigenization measures in the Gulf countries, which reduced their demand for migrant workers. As a result, Pakistan’s exports declined for the third consecutive year, with receipts dropped 1.3 percent in FY17. In case of remittances, inflows declined 3.1 percent during the year, with major drag coming from the GCC countries. The implications of decline in exports and remittances on the overall balance of payments has evident in the shape of $ 1.7 billion drop in country’s foreign exchange reserves in FY17, against a current account gap of over $ 12 billion. Two factors checked the current account gap. Firstly, the government was able to muster $ 10.1 billion in gross financing from assorted bilateral, multilateral and commercial sources, effectively leveraging its multi-year progress on the reform plan and the country’s stable credit ratings. Also, the CPEC-linked inflows were available in FY17, as embodied by 38.5 and 49.2 percent stake of China in total gross official inflows (both bilateral and commercial) and foreign direct investment, respectively, during the year. The availability of substantial foreign exchange buffers raised during the past three years empowered the country to endure escalating imbalances.viii The oil import bill is rising for the current FY18 that should be a cause of concern as the balance of payment (BoP) position is exacerbating for the worst. A summary of the imports and exports is depicted in the table.

The increase in the current account deficit was mainly due to a 17.8 percent surge in the country’s import bill, which shot up to a record $ 48.6 billion in FY17.

Contribution of POL to state revenues in Pakistan

The import of petroleum products during the FY 2017 was $ 10.606 million including petroleum of $ 6.379, crude of $ 2.764 and liquefied natural gas (LNG) of $ 1.270.ix

For the financial year 2015-16, net collection of domestic general sales tax (GST) from POL was Rs 269.764 million out of total GST (domestic) collection of Rs 640.167 million and its share works out to 42.1%. Net collection of GST (domestic) from electricity was Rs 37.379 million out of total GST (domestic) collection of Rs 640.167 million and its share works out to 5.8%. Net collection of GST (domestic) from natural gas was Rs 18.241 million out of total GST (domestic) collection of Rs 640.167 million and its share works out to 2.8%.

Net collection of GST (imports) from petroleum (POL) products was Rs 219.097 million out of total GST (imports) collection of Rs 683.518 million and its share works out to 32%.

Customs duty from POL products is Rs 37.992 million, which works out to 9.1% of the net collection from customs duty of Rs 406.180 million. Collection from withholding tax on imports is Rs 179.729 million, which works out to 22.8% of the total withholding income tax collection for the FY 2015-16 and this collection is inclusive of tax on POL products.

The net collection of the Federal Board of Revenue (FBR) for the FY 2015-16 was Rs 3112 billion. Collection of GST (imports & domestic) and Customs duty from POL works out to almost 17% of the total collection of FBR and remains a steady revenue stream requiring little effort in its collection. From a revenue aspect, POL is a sacred animal.

Subsidies in Asia

Essentially the Pakistani government provides electricity subsidies to users, but is unable to pay off the subsidies’ cost difference to electricity providers, who in turn, are running low on the cash reserves necessary to pay Independent Power Producers (IPPs) and fuel suppliers. The government pays a certain portion of this debt owed by state-owned power companies to private power producers and Pakistan State Oil, but it is still not enough to cover the losses. The debt has at times crossed the Rs 800 billion mark.

Pakistan does not provide any subsidy on petroleum products. Fossil fuel subsidies in India, Indonesia, Malaysia and Thailand are extensive at 2.7%, 4.1%, 2.6% and 1.9% of gross domestic product (GDP), respectively, in 2012. Any tinkering in subsidy or energy reform in these countries may have a significant impact on energy system as well as businesses, industry and households. Removing subsidies will allow energy companies to repay debts and create an incentive to rebuild and extend infrastructure, thereby improving the reliability and quality of fuel supply. Subsidies on fuel generally have the least impact on the poorest or vulnerable class.x For Indonesia, Thailand and Malaysia the share of government expenditure is 14.3%, 15.2% and 10.1%.xi For subsidy to be recovered tax has to be raised or recovered as well. Governments’ response to slowing exports has been the standard ploy namely to devalue their currency. Nonetheless, fuel prices have a real market cost, and a devalued currency buys less fuel in the open market which does not enhance exports in the long-term.

The energy subsidies by country as per the International Atomic Agency reveals Iran at $ 20 billion, Saudi Arabia $ 29 billion, China $ 12 billion, India $ 14 billion, Thailand $ 0.7 billion, Malaysia $ 1 billion, Pakistan $ 0.01 billion, Bangladesh $ 0.02 billion.xii China subsidizes petroleum prices through a mechanism of retail ceiling based upon a basket of international prices whereas Indonesia, Malaysia and India manage through budget subsidy. Vietnam subsidizes oil prices through a price management fund.

Pricing structure of petroleum products in Pakistan

In Pakistan, the price structure of fossil fuels at retail stage in respect of petroleum products refined by refineries in Pakistan and imports includes petroleum levy and GST which is adjusted as per revenue requirements and political expediencies. Among petroleum products, diesel is consumed the most and it is extensively used in the agriculture and transport sectors. Its high price triggers inflation as passenger travel and goods transportation becomes expensive. According to a report prepared and sent by the Oil and Gas Regulatory Authority to the Economic Coordination Committee, the FY 2015-16 was the worst for Pakistan’s oil consumers during which they paid the highest rate of GST on diesel.xiii The retail price of MS and High Speed Diesel (HSD) is arrived based on the ex-refinery price (of major POL imports) being the import price determined from the Arab Gulf Market Average of imports of Pakistan State Oil, the largest public sector oil marketing company, during the month. The ex-refinery price is inclusive of Customs duty (4% & 12%) on MS and HSD, respectively, at the import stage (local refineries are not subjected to these duties). Then come inland freight, distributors’ margin and dealers’ margin none of which individually or separately is more than 8% of the ex-refinery price. Petroleum levy is presently 22.8% and 18% on MS and HSD, respectively. After adding the petroleum levy to the ex-refinery price GST is charged at 17% and 31% on MS and HSD, respectively, vide SRO 984(I)/2017 dated 30th September 2017 to arrive at the retail price or the price at which the consumers purchase MS and HSD at the filling station. Kerosene and Light Diesel Oil is not charged GST. Since 1st October 2015, GST is charged on the import and supply of furnace oil at the rate of 20% ad valorem vide SRO 962(I)/2015 dated 30th September 2015.

The graphs are showing the share of oil and gas in the energy consumption pattern of Pakistanxiv:

As per Nepraxv the electricity generation fuel-wise is showing in the table:

A comparison of electricity generation costs with Bangladeshxvi are tabulated:

Conclusion

Any rise of the oil import bill of Pakistan increases the cost of production and makes exports less competitive. POL products are not subsidized in Pakistan and LNG is also being imported for power generation purposes which increases the import bill further. POL products are a substantial flow of tax revenue to the national exchequer and the external account gap or deficit is rising and exports declining. The official version is that the HSD and MS retail prices are lower than those prevailing in India and Bangladesh yet no mention is made of the energy-mix of other countries as the price of electricity generation from hydel and coal is lower than that of thermal power generation therefore the exports from these countries are competitive internationally as compared to Pakistan. The energy policy and finance planners have to decide whether to subsidize oil costs so as to reduce electricity power generation costs which directly or indirectly pushes up cost of production of exports thus rendering exports uncompetitive or to switch over to other sources of electricity generation which have lower electricity generation costs yet may require extensive capital investment. Refineries in Pakistan produce a range of refined products to remain commercially viable. Since our reliance on thermal energy production has been mainly from furnace oil hence any shift to gas or coal-based energy generation would imply that furnace oil produced locally would not be consumed and may lead to an exportable surplus and the economics need to be worked out. An immediate and perhaps radical approach may be necessary to arrest and reverse the declining trend of exports of the country and this may involve fuel subsidization or a substantial reduction in taxes on POL. The government would have to recoup its revenue loss from POL from other areas which previously got of lightly. Declining exports accompanied by rising repatriation on FDI of does not augur well for the economic development of the country and for the much-needed BoP support Pakistan may have to approach international lending agencies whose programs curb GDP growth.

(The writer Razeen Ahmed has done his Bachelor of Science in Business and Management from the London School of Economics and Political Science and is presently doing Masters in Sustainable Development from SOAS. He is currently involved in research in the areas of finance, energy and environment related to sustainable development)

References

i GlobalPetrolPrices.com, http://www.globalpetrolprices.com/gasoline_prices

ii Daniel Workman , Crude Oil Exports by country, http://www.worldstopexports.com/crude-oil-imports-by-country/

iii Pakistan’s Wind Market Country Report Part I 2015 ,https://www.erneuerbareenergien.de/pakistans-wind-market-part-1/150/434/84979/

iv State of Industry Report 2015 National Electricity Power Regulatory Authority, http://www.nepra.org.pk/Publications/State%20of%20Industry%20Reports/State%20of%20Industry%20Report%202015.pdf

v Coal use for power generation in China, Science Direct, http://www.sciencedirect.com/science/article/pii/S0921344916300556

vi Australian Government, Department of Industry and Sciences, https://www.industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/Coal-in-India.pdf

vii US Energy Information Administration, https://www.eia.gov/tools/faqs/faq.php?id=427&t=3

viii State Bank of Pakistan Annual Report, http://www.sbp.org.pk/reports/annual/arFY17/Chapter-06.pdf

ix State Bank of Pakistan Commodity wise import data, http://www.sbp.org.pk/ecodata/Import_Payments_by_Commodity.pdf

x ADB, Fossil Fuel Subsidies in Asia, An Integrated Approach, https://www.adb.org/sites/default/files/publication/182255/fossil-fuel-subsidies-asia.pdf

xi Asian Pathways, ADB Institute, https://www.asiapathways-adbi.org/2014/08/southeast-asias-energy-subsidies-are-a-tax-on-development/

xii International Energy Agency ,https://www.iea.org/statistics/resources/energysubsidies/

xiii Express Tribune, Zafar Bhutta, 2017, https://tribune.com.pk/story/1364987/oil-consumers-paying-38-global-prices/

xiv Pakistan Economic Survey 2015-16

xv State of Industry Report 2015 National Electricity Power Regulatory Authority, http://www.nepra.org.pk/Publications/State%20of%20Industry%20Reports/State%20of%20Industry%20Report%202015.pdf

xvi Bangladesh Power Development Board, RFP Economic Analysis ,https://www.adb.org/sites/default/files/linked-documents/44192-016-ea.pdf