How the Power Sector of Pakistan Is Deindustrializing the Economy |
When we talk about Pakistan’s economic condition, it is typically in terms of fiscal or balance of payments deficits or IMF packages. But this masks a more pressing and corrosive reality: Pakistan is deindustrializing. And the core culprit for this is the power sector of Pakistan, aka electricity.
With industrial electricity tariff rates of 15.7 US cents per kilowatt-hour, Pakistan now has some of the highest rates in the region, despite having much lower wages and per capita income than its rivals. The rates in competitor countries such as India, Vietnam, and China are only one-quarter of the rate. The significance of this, however, is sobering: every unit produced in Pakistan is less cost-competitive as soon as it crosses Pakistan’s borders.
This is not an efficiency problem. It is a binding constraint on economic growth.
A Policy on Energy Leads to a Policy on Industry
The evidence suggests that the key variable affecting Pakistan’s industrial performance is the price of energy. Pakistan has had three years of contracting large-scale manufacturing, the loss of nearly 200 textile factories, and a loss of export competitiveness.
Pakistan has already conducted an experiment. When the government introduced regionally competitive energy tariffs (RCET), setting the industrial electricity rate at 9 cents per unit, exports of textiles increased by over 50% in a year. Subsequently, when the tariffs were lifted, exports fell and stopped growing.
The implication for policy is that energy prices are not a background variable—they........