Power outages may cut growth

ISLAMABAD: Power outages are estimated to cut Pakistans economic growth by 2 percentage points annually.
In its latest Asian Development Outlook Supplement, ADB points out that with little prospects for improving energy supply or investment, economic growth is expected to remain weak at 3.5 per cent in fiscal year 2014.
According to the report, power outages are estimated to cut economic growth by 2 percentage points annually, and without significant reforms, the country may not move towards the 7pc growth rate which is needed to generate adequate employment and meaningful poverty reduction.Since deterioration in the power sector is the main physical constraint on growth and a major cause of financial and economic instability, the current environment in the power sector, in which receipts do not cover costs, means that for every unit of power sold, there is a large loss that is either covered by a government subsidy or becomes part of the continuously accumulating arrears of the state-owned power companies, the report points out.
While it will take time to move to a more efficient system for generating, transmitting, and distributing electricity, improvements to collection, adjustments to pricing mechanisms, and improved management could enable higher power generation, lift the financial burden on the budget, and motivate private investment in the sector.
The report says that the existing pattern of consumption-led growth with falling investment is unsustainable and unchanged policies marked by the lack of structural reforms, high fiscal deficits, and accommodative monetary policies will mean continued slow growth, excessive inflation, and a weakening balance of payments that drains official reserves.
According to the report, continued weak export prospects, combined with limited import demand held down by slow domestic growth and relatively stable global prices for oil, support a projection that the current deficit will increase marginally to 0.9pc of GDP in fiscal year 2014.
However, weak capital flows and large debt repayments, including to the IMF, will put pressure on the official reserves and the exchange rate, points out the report.
The report says that large loss-making public sector enterprises absorb fiscal resources without any apparent improvement in their operation or financial viability.
Explicit subsidies included in the budget for them are limited, as most assistance is in the form of sovereign loan guarantees that require lump sum payouts from the government at crisis points.
The report notes that large government borrowings from commercial banks requires ever-larger injections from the central bank on a weekly basis to meet banks1 liquidity requirements and keep money market rates anchored within central bank policy rates.