An economy of shortages
By Shahid Javed Burki
Monday, 05 Sep, 2011
TODAY, more than three years into the rule by the current government, the Pakistani economy is beset by a number of shortages. All of them are critical. Without concerted effort to overcome them, they will do a huge amount of damage to the economy.
Pakistan can be appropriately described as a “shortage economy”. It is short of its own saving to promote development. That makes the country dependent on external capital flows which tend to limit the freedom of manoeuvre in the field of international politics.
It is short of a skilled workforce because of the poor quality of its educational system, particularly in the public sector. This means that the country is not able to take full advantage of its large and young population. It is getting close to being classified as a “water stressed” country with projected sharp declines in the amount of water that flows through its rivers. This will be the consequence of climate change which, according to a World Bank report, will melt a significant amount of its glacial cover.
It has had to deal with serious shortages of electricity which has resulted in great deal of discomfort for all but particularly those who don’t have the resources to generate their own supply of power. And, it is now faced with a growing shortage of natural gas – a natural resource in which the country once had a large surplus.
What is common with all these shortages is the failure of public policy not just by the government that currently holds the reins of power. This failure has been a constant in the story of Pakistan’s economic development. In the case of each of these five shortages – domestic finance, trained and educated workforce, water, electricity and natural gas – the various administrations that have been in charge failed to address the posed problem from strategic perspectives.
The history is punctuated with ad hoc policy responses. Policymaking was motivated by “short-termism”. This “patchwork” approach to policymaking has had a profound negative impact on the performance of the economy.
The country will continue to under-perform and fail to realise its full potential unless the policymakers adopt a strategic approach. What is required is the right of kind of institutional mechanism that functions for each of these shortages within a consistent and coherent policy framework.
Natural gas is one of the critical inputs that is now in short supply. In recent years there has been a sharp increase in its demand. The increase in the demand is largely the consequence of the price regime the government had adopted for the use of this important resource. The price charged from various users did not reflect is re al cost in the international market which should have been done in terms of oil equivalence.
The price instead was determined by the cost of bringing the gas out of the ground and sending it through pipelines over long distances. The result was that it was under-priced with reference to all other fuels. There was a big switching to gas from other fuels. Industrial users and power producers shifted from oil to natural gas; households moved from its use to coal and wood.The substitution of gas from wood was benefi cial since it slowed down deforestation in the country which has been going on at an alarming rate.
It was with the discovery of the gas field at Sui, Balochistan in 1952 that Pakistan entered the field of major suppliers. Pakistan with estimated reserves of 849 billion cubic meters (bcm) is the 28th largest gas reserve country.
India with over 1.05 trillion bcm is just above Pakistan. It is in the 25th position. Bangladesh with 195 bcm is the 45th the largest producer.The largest producers, of course, are Russia (47.5 tcm), Iran (29.6 tcm), Qatar (25.4 tcm), Turkmenistan (7.5 tcm), Saudi Arabia (6.1 tcm) and Nigeria (5.2 tcm). Interestingly four of the five largest producers of gas are Muslim countries. In spite of its rapid depletion, Sui remains the largest field in Pakistan with reserves of 20 bcm or about onefourth of the total for the country. Put into operation in 1955, it supplies 26 per cent of Pakistan’s total daily consumption. Other large fields in the country are at Qadirabad, Sawan, and Kadanwari, all in Sindh. The northern areas of Punjab have a combined oil and gas field at Toot.
The consumption of gas has been increasing at the annual rate of seven per cent over the last four decades. However, demand has increased at a higher rate, 7.5 per cent in the past decade compared to 4.9 and 5.9 per cent respectively in the 1980s and 1900s.
This increase is largely the result of greater gas consumption by electric power plants. According to one estimate the overall income elasticity for gas demand is high, at 0.86 while the price elasticity is low, at 0.05. Given these elasticities, the demand for gas is likely to increase at a rate of 5.5 to 6.0 per cent year.
“The gap in demand and supply is likely to increase by 342 mmcft by 2014-15 if the supply increases at an annual rate of one per cent. If, on the other hand, there is no increase in supply, the gap will increase to 408 mmcft over the next five years.
The cost to the economy of this shortfall could be as high as Rs110 billion, or 076 per cent of the gross domestic product. There are several reasons why such a severe shortage of gas has appeared. Exploration has not attracted much foreign capital largely because of political uncertainty and the fact that potential exists in the parts of the country where security is a problem.
The large but now depleted gas reserves at Sui in Baluchistan need deeper drilling for which both foreign capital and expertise are needed. According to the IPP’s 2010 report, “16 gas fields having estimated reserves of 2tcf are lying dormant.” Both internal exploration – including in the sea – as well as connecting the country with some very large producers outside the borders should help in resolving the supply problem. Two international pipelines are being planned; one to connect Pakistan with Iran, the other to link the country with Turkmenistan.
The first was initially planned as a three country link, Iran, Pakistan and India. However, it ran into problems; pricing issues including payments to Iran as well as the payment of transit fee by India to Pakistan. The other problem was the imposition of economic sanctions by the United States on Iran that has kept large American companies out of the project.
Generally, Washington does not favour countries it considers its friends to deal with Iran for promoting large commercial ventures. The IPI pipeline falls in this category. Now that New Delhi has close relations with Washington, it has decided to opt out of this project. Pakistan, on the other hand, with difficult relations with the United States, is pressing ahead with it.
Tackling the various shortages should, therefore, be a high priority for the government. The price for not moving expeditiously will be very high; it will be paid in terms of the continuation of the slow rate of economic growth, increase in unemployment and hence in poverty, and of further marginalisation in the global economy.