Pakistan Reader# 662, 4 September 2023
Dhriti Mukherjee
The electricity bill crisis
On 04 September, following a sustained rise in the price of electricity bills, public protests began becoming widespread. Since the third week of August, Pakistan has been experiencing inflated electricity bills, with rates jumping by 100 per cent to 200 per cent.
The Interim Finance Minister Shamshad Akhtar stated that there was no “fiscal space” to help consumers with the electricity crisis, as the economy is facing 30 per cent inflation. She has described this to be a “worse than anticipated” economic situation. The Pakistan Bureau of Statistics (PBS) revealed headline inflation of 27.4 per cent in August. It has elicited public protest via shutting down shops and signs that denounced the “the unreasonable increase in electricity bills and taxes.” People took to the streets to burn their bills in protest, with threats of a civil disobedience emerging in recent days.
Although the issue of hiked bills has been prevalent for a considerable amount of time, the mass public dissatisfaction has risen due to the free rider problem, an absence of transparent records, and similar hikes in food and fuel prices. It was also heightened due to the government’s statements, with the energy minister saying that the “the soaring dollar rate and increase in global petroleum prices have meant that petroleum products are costing Pakistan much more.” This is why electricity rates rose, “since the power was partly being generated from expensive imported fuel.”
What caused the soar?
There are several causes that contributed to the soar in bill prices. The major cause is the circular debt that is rampant in the economy. According to a board member of the State Bank of Pakistan, the underlying cause behind this is that “Independent power producer contracts are dollar-denominated and based on capacity payments, which has resulted in the circular debt problem.” This debt has been furthered due to unreleased subsidies and interest charges on delayed payments, to reach PKR 2.64 trillion rupees as of August 2023. As the government has failed to address this deep rooted issue, according to a report by The News International, 50 per cent of the electricity bill is attributed to “government inefficiencies.”
Another major issue that has become the recipient of public backlash is the supply of free units of electricity to power sector employees. The practice of providing free electricity in Pakistan has resulted in a substantial financial burden on both state-owned entities in the power sector and government departments. A former CEO of a power distribution company Disco emphasized the relative insignificance of the cost of free electricity units for power sector employees alone compared to the enormous capacity payments. Approximately 120,000 employees of state-owned organizations receive electricity based on their pay scales, amounting to PKR 22 billion annually.
Aside from this, like the JI party, many have attributed the crisis to the agreements made by previous governments with the IPPs. This agreement stipulates that regardless of how much electricity was distributed, the government remains obligated to pay them. Owing to ongoing weather conditions which generated low consumer demand, and the exorbitant surging rates, many IPPs shut down and remained idle. Despite this, consumers have been urged by Kakar to pay PKR 1.3 trillion in the form of capacity payments.
What has been the government’s response?
The increase has been “passed on to the consumers.” Subsequently, Interim Prime Minister Anwaarul Haq Kakar has described the protests to be politically motivated, based on the actions by some parties with reference to the inflated bills. This majorly includes the protests staged by the Jamaat-e-Islami party, whose leader blames the agreements made with Individual Power Producers (IPPs) for the inflated bills.
Having earlier promised relief to power consumer over their bills, Kakar has now termed the situation as a “non- issue,” implying that the concerns of these individuals would not be addressed. He has attributed the surging electricity prices to the stringent conditions of the USD three billion bailout agreement forged with the International Monetary Fund (IMF). As per the agreement, the IMF required the Pakistani government to increase their tax revenue, as a result of which the prices went up by PKR 7.5 per unit. 40 to 50 per cent of electricity bills are linked to taxes imposed by the government, exclusive of a tariff rationalisation surcharge and a financial surcharge. These costs have been translated into increased rates from power distribution companies, leading to mass outcry. The caretaker government has tried to reassure the public by saying that since “markets are psychological,” economic and financial conditions will improve.
What are the likely fallouts?
Pakistan faces mounting political pressure, particularly regarding the timeline for the upcoming general elections. During inception, the caretaker government vowed to meet the IMF requirements and continue the policies that were being pursued by the previous government. The ‘balancing act between the Constitution and the ECP’ that is currently ongoing has led to concerns about potential delays. This delay is potentially the cause behind the government not having a long term goal in mind. Political experts have stated that even if it wanted to subsidise the bills, it “has nothing” to borrow from. Thus, its hands are tied. Shehbaz Sharif on the economic turmoil over the electricity bills stated, “unless they give a date of election and spell out priorities, things are going to get worse, unfortunately.”
The uncertainty surrounding the elections and the hike in prices have led to instability in the capital market, discouraged investments, and could exacerbate capital flight. Engineering firms particularly lost out on their competitiveness due to challenges in efficiency and achieving goals, creating a shortage. 95 per cent of firms have reportedly had no access to finance, and 78pc companies have also been experiencing operational inefficiency due to power fluctuations. Companies are also undoing severe financial strain, as they are forced to invest in uninterruptible power supply (UPS) systems. Additionally, the supply chain disruptions have reduced their international competitiveness. The confluence of the crises mentioned above present a significant threat to Pakistan’s economic future.
However, it is important to note that the caretaker government has nothing to lose politically, regardless of how this situation is resolved. Although their tenure is uncertain, there are no implications that this challenge imposes on them. Since it is an ad hoc government, once the general election results are declared, the problem of inflated bills will inevitably become the problem of the next government.
References
Khalid Hasnain, “Free electricity quotas merely tip of iceberg,” Dawn, 04 September 2023;
“JI to move SC against deals with IPPs,” Dawn, 04 September 2023;
Khaleeq Kiana, “Electricity issues cast dim light on engineering sector,” Dawn, 04 September 2023;
Nasir Jamal, “Paying for the free riders of electricity,” Dawn, 04 September 2023;
Maleeha Lodhi, “Power failure,” Dawn, 04 September 2023;
Zafar Bhutta & Rizwan Shehzad, “PM caught between a rock and a hard place,” The Express Tribune, 04 September 2023;
“JI leaders booked for protesting against hike in power prices,” The Express Tribune, 03 September 2023;
Adnan Amir, “Pakistan’s inflated electricity rates spark public uproar,” Nikkei Asia, 04 September 2023;
Zofeen T Ebrahim, “Pakistan in uproar as protests over soaring energy prices turn violent,” Al Jazeera, 05 September 2023
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