Rational hike

The vast majority of the Pakistani urban middle class will no doubt see it as a lamentable hike in the prices of an essential fuel. In reality, however, the increase in natural gas prices due to take effect as of November 1, 2023 is something else. Let us just take a mild view of the matter and call it a rationalization of the price of the fuel of the privileged to bring it more in line with the exorbitant prices paid by the majority of households using less convenient fuels. This characterization of piped natural gas may well be received with a measure of astonishment by many because we of the urban middle class tend to view ourselves as the overwhelming majority, qualified to pass binding judgements. That notion, however, is misplaced. Piped natural gas is available to less than a third of all Pakistani households, the rest making do with fuels like LPG, coal, firewood, cow dung, and so forth. Also addicted to piped natural gas at highly subsidized rates are industries of the rent-seeking classes, including textile, cement, powergen, and of course, fertiliser, which uses natural gas as feedstock for urea production. Still, Pakistan being one of the most gas intensive economies of the world, the price hike is likely to weigh more or less heavily on the budgets of many households and businesses, and as such merits closer examination.

The irrationally low natural gas prices have been a drain on the Pakistani economy for decades. Their impact began to surface in the form of losses suffered by the twin Sui gas companies as early as 2013-14, when the two companies’ collective losses totaled to Rs18.0 billion. Ever since, the losses have maintained an upward trajectory. The situation went from bad to outright crazy when the government started pumping expensive imported RLNG into the system, still keeping the prices much below the cost, and the gas companies’ losses reached Rs879.0 billion in 2022-23. Over the years, these losses have bloated the energy sector circular debt, which totalled to Rs2.10 trillion by the end of fiscal year 2022-23 and was on track to reach Rs2.48 trillion by the end of FY 2023-24 without the current gas price hike, according to official estimates.

Clearly, this disaster was brought on by the inability of successive governments to raise gas prices in line with market realities. It speaks to the impotence of our political governments in the face of decisions of crucial national importance that this much-needed price hike is finally coming under the aegis of a caretaker government, and that too on the nudging of the IMF and in view of an urgent need for additional revenue to balance out budget. The ill effects of the artificially low gas prices suffered by Pakistanis economy include a widening fiscal deficit and higher public borrowing needs. But perhaps the biggest toll imposed by a low gas price on the country’s economy has been a veritable freeze on exploration and drilling activity to exploit Pakistan’s substantial untapped gas reserves. Had we brought those reserves online in a timely manner, the need to import expensive LNG would most probably never arise. Lower fuel import bill would have given us a stronger rupee, lower inflation, and lower policy rate today. Let us hope the current price hike helps the government cutback the circular debt, in addition to kickstarting development of the country’s proven gas reserves, eventually helping cut down the fuel import bill.

The government’s assertion that the current price hike will have no impact on protected categories of domestic consumers – comprising almost 57 per cent of household connections – and tandoors, is encouraging. Equally comforting is the prospect that the authorities are affording some kind of protection to up to 93 per cent of low-consumption consumers. Given the high level of economic hardship prevalent today, it is important that we protect the less fortunate among us from any additional burden, especially when it comes to keeping the kitchen stove going.