Prime Minister Imran Khan flanked by five relevant federal ministers and one Advisor to the Prime Minister announced an industrial promotion package which has the potential to play a critical role in jumpstarting the economy in general and small and medium enterprises (SMEs) in particular (the hardest hit by the pandemic) and must, therefore, be fully supported.

The package seeks to provide additional consumption (additional from what was procured last year by the unit) at 50 percent less than the prevalent rate which, without doubt, is a step in the right direction. To clarify, the Prime Minister stated that if an SME was purchasing electricity at 16 rupees per unit last year then the cost of purchasing additional electricity (additional to what was purchased last year) from November onwards would be 8 rupees per unit. And over the next three years, till the end of the tenure of the present government, large scale manufacturing units (LSM) and SMEs would pay 25 percent less on consumption of additional electricity.

At last count, there were 3.3 million SMEs in Pakistan, including manufacturing units and service providers employing over 78 percent of non-agricultural labour force, accounting for 25 percent of exports and 30 percent of Gross Domestic Product GDP. Previous studies indicate that the major issue facing the SMEs was power shortage, unscheduled load shedding and last but not least the rising electricity tariffs. It is therefore expected that a tariff reduction, a major input cost for most LSMs and SMEs, would provide the necessary impetus to raise output, exports, GDP and last but not least raise the tax revenue of the government – positive elements that were highlighted by the Prime Minister during his announcement of the package.

A Business Recorder exclusive provides details of the cost to the exchequer of the package determined as per the directions of the Prime Minister’s office to the relevant entities, including Power and Finance Divisions; in other words, the additional subsidy to what has been budgeted that would be required to fund the relief in tariff that differs for different business categories is as follows: (i) 31 billion rupees for the current year (with 21 billion rupees diverted from the Covid-19 package) and 59 billion rupees to be budgeted for fiscal year 2022 and 2023 and released each month; the determination is that all proposed rate structures are subsidy neutral except the 8 rupee per unit proposal; and (ii) the federal government would have to pay the entire package as subsidy for industrial consumers of K-Electric and if the same rate is to be applicable for off-peak hours then Karachi would be subjected to prolonged hours of load-shedding, particularly during the summer months in view of constrained available generation.

The subsidy amount, the differential between the incremental cost/base tariff between the Power and Finance divisions would be reconciled each month though the fuel price adjustment (FPC) maybe passed onto the industrial consumers on incremental consumption basis. If one contrasts the November 2020 industrial incentive package with the February 2016 industrial package the then government reduced power tariffs by 3 rupees per unit across the board inclusive of any downward revision of FPC January 2016 onwards and the difference between the payment due from industrial consumers and special relief package was to be adjusted with any downward revision of FPC to be paid to Discos and K-electric by the federal government. However, at the time the package was not fully implemented due to what was considered as the International Monetary Fund’s (IMF’s) energy sector related conditionalities. Those conditionalities are applicable today as well and one would have to wait and see if the Khan administration is able to deliver the package based on the ongoing tough negotiations with the Fund for release of the second tranche.

To conclude, electricity tariffs are a major input cost of our productive sector that impede it from effectively competing in the international market as well as the domestic market due to massive smuggling across our porous borders. While given the state of the economy it was imperative to reduce rates yet the long-term solution would be to improve the performance of the energy sector and thereby tackle the rising circular debt which is at present close to 2.3 trillion rupees against the 1.2 trillion rupees this government inherited.