Expansionary Institute

Michael Zey
futurist3000@aol.com

By Saeed Azhar

 
KARACHI, Nov 19 (Reuters) - High world oil prices are inflicting fresh pain on Pakistanis who know they can expect little help from their government.

Karachi, Pakistan's largest city, main port and industrial hub, suffers daily power cuts simply because its loss-making power utility cannot afford the 4,000 tonnes of fuel oil a day it needs to make electricity.

The state-owned Karachi Electric Supply Corporation (KESC), the city's sole power supplier, has imposed two-hour power cuts -- hitting industry in the evening, as well as commercial and residential customers during the day.

"How would we be able to attract investment and confidence of investors?" said Abdullah Rafi, chairman of Karachi's main industrial body, SITE Association of Industry.

The cuts, which follow unannounced outages blamed on the utility's shaky infrastructure, began in October when the cash-strapped utility decided to shut down one of the six 210-megawatt units at its main plant.

"The KESC is testing the consumers' patience beyond belief," the influential Dawn newspaper said in an editorial.

But, as long as world oil prices remain high there is little hope of relief.

The military government, with usable foreign reserves worth less than the equivalent of one month's imports, is not only unable to help but also under international pressure to take strict measures that would inflict more economic pain.

Multilateral donors have advised the government against inflating its already large fiscal deficit by offering funds to troubled state utilities.

Domestic prices of furnace oil needed by the power plants have doubled over the last year to 13,400 rupees ($235) a tonne.

PRICES RISING

The Karachi power cuts -- made all the more unbearable by a heat-wave in October -- followed the government's September decision to hike domestic prices for petroleum products. That price rise, made in response to rising international prices, was the third in Pakistan since June.

Pakistan, like much of Asia, is highly dependent on imported fuel. It produces 57,000 barrels of oil a day, equivalent to just 15 percent of the daily domestic demand of 385,000 barrels.

Financial analysts say that, despite a recent textile-driven growth in exports, rising oil import prices will cause the country's trade gap for this fiscal year to widen, leaving the government even less room for manoeuvre. The fiscal year runs from July to June.

"Our estimate is that in line with the high global prices, the oil import bill can touch a level of $3.4 billion or 32 percent of the total estimated import bill," said Mohammad Sohail, research head at brokers Investcap Securities Ltd.

Pakistan's trade deficit for the fiscal year to June was $1.7 billion, with an oil bill of $2.85 billion accounting for 27 percent of total import value.

The government has had little choice but to link domestic fuel prices to international levels, which in turn pushed up costs in one of Asia's poorest countries.

The International Monetary Fund, with which Pakistan's year-old military government is negotiating a loan package, wants controls on energy imports and the removal of state pricing.

"Because of the spiraling crude prices, which have risen to over $30 a barrel, we have been grappling with the issue of domestic product prices," Petroleum Minister Usman Aminuddin told an energy conference last month.

Although the government has boosted use of local compressed natural gas -- 100,000 petrol vehicles have been converted -- overall efforts to switch to alternative local energy sources have made slow progress.

GOVERNMENT NEEDS REVENUE

But consumers facing powercuts and higher prices have little sympathy for the government's financial predicament, which was already difficult before rising oil prices made it more precarious.

They remember in 1998 the government, facing a financial crunch from international sanctions triggered by nuclear weapons tests, raised prices to increase revenue even when world prices dropped below $10 a barrel.

"In 1998, when the prices were at a record low, the government raised motor gasoline prices by 20 percent to collect more revenue from petroleum taxes," said Asad Sayeed, an economist at the Pakistan Institute of Labour Research.

The government charges a petroleum surcharge and a 15 percent sales tax on retail petroleum products to compensate for its failure to tax a largely undocumented economy where massive tax evasion is routine. Tax on petrol comes in at over 50 percent.

"This system is basically to tackle a fiscal situation, but it is most inequitable and non-progressive," Sayeed said.

This year, with world prices rising, a government decision to remove state controls from fuel oil has meant higher domestic prices without much rise in government revenue.

With consumers fuming over higher prices and erratic electricity supplies, the government is now facing a dilemma on how to deregulate the diesel sector.

The IMF wants Pakistan to leave energy pricing to market forces, while consumers demand continued heavy subsidies on diesel fuel, which affects the cost of all public transport.

20:36 11-18-00

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