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Tuesday, January 31, 2023

Energy Crisis in Pakistan: Exogenous Shocks and Domestic Woes

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The world had been battered by the COVID-19 pandemic, a once-in-a-century “system shock.” The pandemic exposed the vulnerabilities in the interconnectivity of global supply chains. There were optimistic expectations that by the end of 2022, the worst would have been over. But as global developments in recent months have shown, it was yet to come. The far-reaching consequences of the ongoing war in Ukraine have washed away hopes of a progressive post-pandemic economic recovery. The war and its knock-on effects have pushed hundreds of millions of the most vulnerable communities into poverty and an energy crisis. It also created an alarming cost-of-living crisis due to skyrocketing food and fuel prices. A UNDP report has highlighted how, in just three months after the outbreak of this regional conflict, over 70 million people had fallen into poverty at a faster rate than during the outbreak of a global pandemic.

Effects of Russia-Ukraine War

The growing price of basic goods around the world is a sign of the war’s aftereffects. It also led to the global interest rate hikes that followed in tackling the resulting inflation. That further added to the financial woes of the hardest-hit developing countries. Particularly those with the poorest households and limited fiscal maneuverability are struggling the most. Worldwide shortages of stable foods have triggered turmoil in commodity markets. Ukraine and Russia supplied the majority of wheat and barley to thirty-six countries. The subsequent disruption in supplies after the war had devastating consequences for them. Many of which were already among the most impoverished and vulnerable.

Because of the fragility of our interconnected global resource system, importing food under such circumstances has become unfeasible for such states, who also have to cope with drastic declines in domestic food production over the past year. Partly due to rising fuel costs which have simultaneously increased the prices of fertilizers, transportation of goods, energy production, and climate disasters that have ravaged crop yields. Consequently, the number of people suffering from acute food insecurity has doubled in the last couple of years.

A Global Recession?

Addressing these pressing concerns requires dollars that cash-strapped nations have drained over the past months in servicing debt and procuring overpriced commodity goods. Moreover, UNCTAD, in its latest report, has warned how tightening fiscal and Monetary policies in western states is contributing to prolonged stagnation. And nearing closer to a potential global recession which would be worse than the economic shocks of COVID-19 and the financial crisis in 2008.

Such exogenous shocks have pushed the limits of societal cohesion in fragile states like Pakistan. They have also led the state to the brink of a severe energy crisis. The country had been walking a tightrope between economic and political instability since the controversial ouster of its former Prime minister. Almost losing its balance and tipping over recently until it secured an IMF bailout after prolonged negotiations, averting a speculated default. The achievement of a fresh financial lifeline had given policymakers great joy, and they anticipated additional support from friendly nations and other international institutions. They had no idea that in the next weeks, their fears of suffering the same fate as Sri Lanka would only grow.

Climate Crisis in Pakistan

The torrential rains submerged one-third of the nation after the prolonged heat waves throughout the summer. And subsequent flooding in the South alongside glacial outbursts in the North. Tens of billions of dollars in expected losses and rehabilitation. The state’s inability to regulate external forces will hamper recovery attempts. Months of political and financial crises have left the national economy on a knife edge. The U.N. has acknowledged how the country had been forced to the frontlines of a human-induced climate crisis as it was already dealing with economic turmoil. The director of the U.N. Food Program in Pakistan had expressed concern about the devastating impact on food security in the region.

The agricultural sector has witnessed unparalleled destruction. Especially cash crops like cotton, which have always been a critical source of revenue. A U.N. report revealed the extent of the losses in production, with nearly one-third of the produce in Sindh being destroyed. After importing cotton to make up for the current scarcity, the nation’s textile industry, which is heavily dependent on supplies of cotton for its exports, is predicted to suffer billion-dollar losses.

Such circumstances have led to tightening fiscal space from both the revenue and spending sides. Resources used for humanitarian aid and reconstruction will increase export losses. Servicing foreign debt and paying the mounting energy import bills will become even more complex.

Energy Crisis in Pakistan

The energy sector in Pakistan is especially vulnerable to exogenous shocks, such as increasing input costs, considering the country’s overreliance on energy imports, particularly fossil fuels. Even before infrastructural damage to power plants caused by the floods, there was a looming energy crisis as fuel imports were steadily depleting the country’s foreign currency reserves. Prices of petroleum products have increased owing to certain IMF conditions and the strengthening of the dollar, even more so after the recent fed hike.

Soaring global LNG prices due to the war in Ukraine and subsequent sanctions on Russian supplies have also led to historic inflationary pressures being placed on Pakistan’s commercial sector, with supplies now a thousand times more expensive than just a couple of years ago. With the energy crunch in Europe diverting Asian supplies, Pakistan had to pay $5 billion for LNG imports in June 2022, the highest import bill to date.

Domestic Woes

Winter is just around the corner, and the supplies won’t be able to meet the rising demand. The consequences of this will be multifaceted and felt across all spheres of society. Widespread discontent will result because of the difficulty in producing energy from gas. It will be necessary to ration electricity and divert it away from power-hungry industries like fertilizers, which will harm harvests the next year in the long run in addition to causing commercial losses.

Consumers who rely on gas cylinders for their home needs will have to bear the brunt of the rising prices nearing unaffordability for many. The shortfall is inevitable considering suppliers have recently defaulted, giving Pakistan the short end of the stick, alongside unsuccessful attempts to attain a long-term LNG contract as Europe had already booked all cargo. 

All of these factors contributed to the historic inflation experienced in August 2022. A 50-year-high amid the backdrop of a global economic slowdown. Given the volatility in the international markets and our polarized domestic political atmosphere, with leaders engaging in rhetorical scoring rather than collaborative consultations with stakeholders to avert the future energy crisis in the country, these inflationary trends are likely to remain for the foreseeable future. 

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