THE prime minister wants to bring down the cost of electricity. He should start by repairing the fiscal equation of the state. There is no harm in talking with power producers to see if coal-fired power plants can be shifted to domestic coal as a way to bring down fuel costs. It is also good to order a move towards smart metering in the distribution companies, something that should have been done many years ago.
But these steps, and others like them, will not amount to much if currency devaluation continues at the pace it has since 2017. The biggest driver behind rising power tariffs is currency devaluation. Pressing on the components of the cost build-up is tinkering on the margins. And the biggest reason why the currency has been under relentless pressure since 2017 is the monetisation of the fiscal deficit.
To put it simply, they’ve been printing money to pay their bills in accelerating quantities, and that money printing has put pressure on the exchange rate because you have more rupees chasing fewer dollars. In order to alleviate this pressure, successive governments have resorted to borrowing from external sources to shore up the availability of foreign exchange, and then used the State Bank’s powers to manage the exchange rate.
This is a losing gambit, because it drives up external debt, piles on debt service obligations, and promotes import-based consumption, because the surplus demand created by the monetisation of the deficit goes primarily into imported products. Pakistan is relying increasingly on imported energy since our gas........