Under-investment in generation capacity causes power shortage: Asian Development Bank

[Naveed Yaseen]

ASMA RAZAQ
ISLAMABAD (November 09 2008): The present power shortages in Pakistan are the result of chronic underinvestment in generation capacity, high operational inefficiencies due to lack of expansion of power transmission and distribution infrastructure, and delayed institutional reforms, says a report released by the Asian Development Bank (ADB).

The updated report titled 'Asian Development Outlook 2008', says that FY2007-08 was a tumultuous year, and GDP growth slowed to 5.8 percent. Agriculture, in particular, suffered as major crops such as cotton and wheat failed to reach their targets because of weather conditions, insufficient water, pest attacks, higher costs of fertiliser, and delayed government announcement of support price for wheat (which led to lower sown area).

The report says that manufacturing growth was hit by a listless textile subsector, power shortages, and political disturbances in major industrial towns, which fell by half, to 5.4 percent, after averaging over 11 percent in the previous four fiscal years.

Construction maintained relatively strong growth. Services remained the main economic driver, rising by 8.2 percent, backed by thriving wholesale and retail trade, a strong expansion in telecommunications and robust financial activity.

According to the report, oil imports increased by 43 percent in 2007-08, and its cost reached $10.5 billion. This was the major cause of worsening trade deficit, which soared by 57.4 percent to $15.3 billion, even though the annual export target of $19.2 billion was exceeded.

The large gap between actual and budgeted subsidies, and higher interest payments overrode the impact of lower-than-targeted development expenditure, and resulted in a significant deterioration in the fiscal deficit, which substantially widened to 7.4 percent of GDP, surpassing the targeted deficit of 4.0percent.

The budgeted revenue target was achieved, helped by rising non-tax collections. However, revenue growth did not match that of nominal GDP, causing the revenue-to-GDP ratio to fall to 14.3 percent 14.9 percent in FY2007, while the tax-to-GDP ratio was stagnant at 10.0 percent, according to the report.

The report says that the main reasons for good export performance were higher rice exports, which increased by 40 percent, following sluggish production and export restrictions in the major rice producing countries and higher international prices; the trebling of cement exports, resulting strong demand Middle East and African countries; and strong growth of exports of chemical products, especially plastic materials.

The robust performance of these categories compensated for the continued stagnation of textile exports, which stemmed strong international competition, domestic production losses due to power shortages, and disruption caused by the political and security situation.

The report shows that the economic prospects for Pakistan in 2008-09 require steadfast commitment by the government to implement the various adjustment targets it has set for itself. It will need to maintain fiscal discipline, persist in cutting down untargeted subsidies and in passing through price increases (while compensating the poor adequately), and reduce reliance on borrowing SBP.

According to the report, growth during the current fiscal in Pakistan is expected to remain subdued at 4.5 percent, with continued slowdown in commodity-producing sectors. Domestic spending will have to rise be than output for the current account deficit to shrink. In these circumstances, export growth becomes crucial, as it will help make the current adjustment less painful. The faster the growth in exports the smaller the reduction in growth required to close the deficit, it said.

The financing of the large fiscal and current account deficits will remain major challenges. If Pakistan's request to, for example, Saudi Arabia to grant a deferred payment facility for oil is granted, it will help reduce pressure to finance the current account deficit.

The long-term solution to the external deficits, however, involves a substantial upgrading and diversification of the export base. The report says that the government of Pakistan also needs to generate greater external inflows to increase foreign exchange reserves through privatisation, access to capital markets, and support international development partners, besides pursuing and finalising the Saudi oil facility.