Asia Program

Pakistan: Meeting Energy, Fiscal Needs

Lead story from September issue of Centerpoint

Sep 01, 2006

While in many respects a troubled country, Pakistan in recent years has experienced robust economic growth. Panelists at a recent Asia Program conference, however, speculated that underlying fiscal problems might be jeopardizing that growth.

Meanwhile, higher energy consumption has placed greater strains on the country's energy resources. During President Bush's visit to Pakistan earlier this year, he and the Pakistani president committed to developing alternative energy sources. Pakistan's current and future energy needs was the topic of another Asia Program conference on June 23.

Fueling the Future
Natural gas and oil supply 80 percent of Pakistan's energy needs but current energy consumption vastly exceeds the supply. For instance, Pakistan currently produces about 18 percent of the oil it consumes, fostering a dependency on imports that places considerable strain on its financial position. Meanwhile, hydropower and coal are underutilized, though Pakistan has potentially ample supplies of both.

Mukhtar Ahmed, energy adviser to Pakistan's prime minister, noted 40 percent of Pakistani households are not connected to the electric grid. During the next 20 years, he warned, Pakistan's energy demand will increase by 350 percent, yet the percentage of its total energy needs met from indigenous sources will fall from 72 to 38 percent.

Ahmed said Pakistan must develop an integrated plan to combine energy imports with indigenous energy resources and develop programs emphasizing greater efficiency and management. No longer can Pakistan afford to consider renewable energy "a curiosity," he said.

Pakistan's government is considering projects that would tap its neighbors' resources, such as importing natural gas from the Middle East and power from Central Asia. Pakistan's long-range energy policy involves a shift from a predominantly state-controlled industry to one that gives the private sector a leading role.

Former Finance Minister of Pakistan Shahid Javed Burki said Pakistan should respond proactively to higher energy demands. He noted energy demand is high in the eastern parts of Pakistan while the western part possesses the majority of energy resources. Burki cautioned against aggravating existing regional conflicts by an inequitable sharing of the wealth generated from the resource-rich west.

Robert Looney of the Naval Postgraduate School described alternative investment scenarios that would, by 2035, dramatically alter Pakistan's energy situation. Choices made today, he asserted, will influence whether Pakistan succeeds in generating high GDP growth rates a generation from now. Meanwhile, Bikash Pandey of Winrock International described alternative clean and renewable energy initiatives in rural areas across India, Bangladesh, Sri Lanka, and Nepal. He said Pakistan could learn from the successful projects of its neighbors.

Consultant Dorothy Lele said Pakistan should make social and human development central to Pakistan's energy development. She stressed the significance of biomass, as it comprises 30 percent of total energy consumption in Pakistan and is the primary low-income household fuel. She questioned its neglect in commercial energy planning.

Pakistani businessman Asad Umar emphasized four roadblocks that prevent private enterprise from playing a larger role in the energy sector: the unstable political situation in the province of Baluchistan; the slow rate of deregulation and privatization; the political controversy and provincial disagreements associated with storage-based hydroelectric power generation projects; and overlapping responsibilities of the Private Power Investment Board and the National Electricity Power Regulatory Authority.

John Hammond of the U.S. Energy Association detailed some of the barriers to U.S. investment in Pakistan's energy sector. He said American businesses tend to lack information about Pakistan's market and regulatory structure. He noted fears of political and financial risks and also noted a U.S. preference for sales of goods and services instead of investments. He said Pakistan must demonstrate to the investing world that successful, unaltered private-power projects can operate without government interference.

The U.S. Chamber of Commerce's Aram Zamgochian emphasized that smaller, less risk-averse companies are interested in investing in Pakistan. He was among several speakers to insist that the U.S. government reconsider its aversion to a Pakistani nuclear energy program.

Pakistan's rising energy demand, according to the U.S. Department of State's Paul Simons, creates opportunities for regional cooperation. To this end, the U.S. Trade and Development Agency recently convened a meeting in Istanbul that produced options for exporting electricity from Central Asia to Pakistan. Vladislav Vucetic of the World Bank provided a troubling assessment of Pakistan's electricity sector. Demand is high, and Pakistan is approaching maximum production capacity, while institutional capacity for policy development and implementation remains low. Such problems could cause investment delays.

Sanjeev Minocha of the International Finance Corporation (IFC) noted the paucity of domestic private sector initiatives in Pakistan. The IFC has sought to raise investor confidence through its funding of private Pakistani energy companies, including the new firm Dewan Petroleum. Ultimately, he said, investment projects must respect the interests of local communities.

Pakistani business executive Zaffar Khan of the Fellowship Fund for Pakistan, a key supporter of the Wilson Center's Pakistan program, emphasized the importance of secure, affordable energy sources for Pakistan's future. Energy, job creation, economic growth, and political stability go hand-in-hand, he said, and Pakistan has the technology to meet its growing energy requirements. The challenge lies in making these options commercially, economically, and politically feasible.

Pakistan's Fiscal Woes
An Asia Program conference in May delved into Pakistan's economy. Despite encouraging economic growth figures, Pakistan largely has ignored fundamental financial sector problems, warned Mushtaq Khan, the Wilson Center's 2005-06 Pakistan scholar and vice president of Citibank.

Until late 1999, Pakistan was in the throes of an unsustainable cycle of borrowing and spending, which policymakers could not halt. Following the October 1999 coup that brought him to power, General (now President) Pervez Musharraf faced a bankrupt country as the IMF program in Pakistan was suspended and foreign exchange reserves fell to dangerously low levels. There was a palpable urgency to revive the IMF reform program needed for debt relief, essential after the freeze of foreign currency accounts in May 1998, following Pakistan's nuclear tests.

Over the past five years, Pakistan's financial situation improved dramatically: remittances flowing into Pakistan soared, the value of the Pakistani rupee appreciated, and a fiscal consolidation occurred as the ratio of Pakistan's deficit to its GDP decreased. As external financing surged, the government no longer needed to borrow from banks, which led banks that were "flush with liquidity" to lend to the private sector. The Pakistani economy currently is imbalanced, fueled by credit-driven growth, which in turn is stoking an already large external deficit. He said the banking sector should tighten interest rates but policymakers and the economic elite oppose this step.

"Any external shock has the ability to reduce or undermine the repayment capacity of the private sector," said Khan. Fiscal reforms are lagging, while domestic debt servicing will soon create new fiscal pressures. Despite high growth rates, fundamental problems include excessive private sector credit and inadequate social development. He said Islamabad and Washington are covering that up in a political move to distort growth levels.

Commentator Andy Baukol of the U.S. Treasury Department noted the IMF had attempted to streamline its conditionality to address the rapid credit growth. It remains to be seen how much Pakistan progresses in privatizing the state banks, as international confidence ultimately lies in the ability of private, rather than state, banks to efficiently manage their loan portfolios.

Shahid Javed Burki warned of the dangers of consumption-driven rather than investment-driven growth. Pakistan may be heading for another economic shock, he said, and recommended a "large dose of structural reform." Manuela Ferro of the World Bank said the real Achilles' heel in Pakistan is not the foreign exchange shortages Khan emphasized, but Pakistan's very slow social development.

Upcoming Events

Experts & Staff