Pakistan Economy "Not in a Good Place"? Atif Mian's Gloom Justified?

Pakistani-American economist Atif Mian has recently analyzed Pakistan's economy in a series of tweets. He has said "Pakistan's economy is not in a good place", adding that the nation's "per capita income has not risen in 3 years (in fact down slightly)". He has particularly mentioned the country's "exaggerated external demand driven by its rentier economy", "flawed energy policy" and "a broken economic decision system" among the main causes for poor economic performance.  Is Atif Mian's diagnosis correct? Is the official reported data Atif Mian using accurate? What is the current PTI government doing or not doing to correct the problems identified by Mr. Mian? Let's try and assess the situation. 

Economist Atif Mian's Tweet on Pakistan Economy

Per Capita Income:

Pakistan's officially reported GDP and per capita incomes are grossly understated. These are based on the last economic census that was done from April 2003 to December 2003 and published in 2005. The last agriculture census was in 2010, and livestock census in 2006, according to Dr. Ishrat Husain, former governor of The State Bank of Pakistan. The country's economy has changed significantly since then, adding several new economic activities while others have become less important.  For example, the Quantum Index of Large Scale Manufacturing (QIM) with 2005-06 base year gives a weight to textiles of 20.9% (Yarn 13.7 and cloth 7.2). But the textile industry has moved up to higher value added products as reflected in its exports. The value added textiles (non-yarn and non-cloth) now make almost 80% of the total textile exports. These changes are not reflected in current GDP calculations. 

In its 2014 annual report, the State Bank of Pakistan talked about a number of new sectors that are either under-reported or not covered at all: "In terms of LSM growth, a number of sectors that are showing strong performance; (for example, fast moving consumer goods (FMCG) sector; plastic products; buses and trucks; and even textiles), are either under reported, or not even covered. The omission of such important sectors from official data coverage, probably explains the apparent disconnect between overall economic activity in the country and the hard numbers in LSM."

Bangladesh just rebased its GDP in 2020-21 to 2015-16. This has boosted its per capita income by double digits for every year since 2015-16.  Bangladesh's per capita income for the 2015-16 fiscal year has now gone up to $1,737 from $1,465 in the old calculation. For the 2019-2020 fiscal, the per capita income has gone up to $2,335 from $2,024.  The new GDP estimate covers 21 sectors, up from 15 sectors previously.  India last rebased its GDP in 2015, a change that bumped up its per capita GDP by double digits. Nigeria's last rebasing in 2012 increased the size of its economy (GDP) by nearly 90%. Pakistan's current base year is 2005-6. Rebasing which is now long overdue will almost certainly increase Pakistan's per capita income by double digits. 

In this age of big data, it is important for Pakistan to ensure that its bureaucracy at Pakistan Bureau of Statistics (PBS) keeps the national economic data as current as possible. PBS should release the results of the Census of Manufacturing Industries CMI 2015-16 and the finance ministry should rebase Pakistan's economy to year 2015-16 to better reflect the current economic realities. This data is extremely important for businesses, investors, lenders and policymakers. 

Energy Mix:

It is true that Pakistan has relied on imported fossil fuels to generate electricity. The cost of these expensive imported fuels like furnace oil mainly used by independent power producers (IPPs) has been and continues to be a major contributor to the "exaggerated external demand driven by its rentier economy" referred to by Atif Mian. However, Pakistan has recently been adding hydronuclear and indigenous coal-fired power plants. 
Pakistan Power Generation Fuel Mix. Source: Third Pole

Construction of a 1,100 MW nuclear power reactor K2 unit in Karachi has been completed by China National Nuclear Corporation, according to media reports. A similar reactor unit K3 will add another 1,100 MW of nuclear power to the grid, bringing the total nuclear power installed capacity of Pakistan to 3,630 MW (12% of total power) by the end of 2022.  Hualong One reactors being installed in Pakistan are based on improved Westinghouse AP1000 design which is far safer than Chernobyl and Fukushima plants.  In addition, Pakistan is also generating  9,389  MW (about 28% of total power) of low-carbon hydroelectric power in response to rising concerns about climate change. 

Hydroelectric dams contributed 37,689 GWH of electricity or 27.6% of the total power generated, making hydropower the biggest contributor to power generated in the country. It is followed by coal (20%), LNG (19%) and nuclear (11.4%). 

Cost Per Unit of Electricity in Pakistan. Source: Arif Habib

Nuclear offers the lowest cost of fuel for electricity (one rupee per KWH) while furnace oil is the most expensive (Rs. 22.2 per KWH). 

Pakistan Exports Trend 2011-21. Courtesy of Ali Khizer

External Accounts Balance:
Pakistan is the world's sixth largest labor exporter with nearly 10 million Pakistanis working overseas. These workers sent home $31 billion in remittances calendar year 2021 (CY2021), up 19% from CY2020. In addition, Pakistan merchandise exports hit a new record of $28.3 billion in CY2021. Together, Pakistan's merchandise exports and overseas worker remittances added up to nearly $60 billion in 2021. 
Pakistan Textile Exports Trend 2011-21. Courtesy of Ali Khizer

Exports of textiles that make up the bulk of Pakistani exports jumped 32% from $13.1 billion in CY2020 to $17.3 billion in CY2021. The country's technology exports soared 40% to $2.5 billion in CY2021.  “So far, (the) country’s exports of non-traditional products, including information technology, have grown by 60 percent in the last four months," says Special Assistant to the Prime Minister on Commerce and Investment Abdul Razak Dawood. 
Pakistan's Higher Value Added Exports. Source: Dr. Ishrat Husain
Pakistan's textile manufacturing and exports are moving from yarn and fabric toward higher value added products like readymade garments. The value added textiles (non-yarn and non-cloth) now make almost 80% of the total textile exports, according to Dr. Ishrat Husain. 
Pakistan's Current Account Balance vs International Oil Prices. Sou...

Recent history shows that Pakistan's current account deficits vary with international oil prices.  Pakistan's trade deficits balloon with rising imported energy prices. One of the keys to managing external account balances lies in reducing the country's dependence on foreign oil and gas. 

Summary:
Professor Atif Mian's criticism of Pakistan's economy is partially valid but his pessimism is unwarranted. He is working with flawed data based on an economic census conducted more than 15 years ago.  This data does not truly reflect current economic activities, per capita incomes and productivity. Pakistani bureaucracy needs to ensure that the underlying data for GDP and productivity is regularly updated to inform businessmen, investors, lenders and policymakers. Pakistan is also significantly boosting its foreign exchange earnings through exports and remittances from overseas workers. The issue of reliance on expensive fossil fuel imports is also being addressed by building more hydro, nuclear and renewable energy. At the same time, indigenous coal-fired power plants are also being added. Unlike Atif Mian, I do see light at the end of the tunnel. 

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Views: 313

Comment by Riaz Haq on May 7, 2022 at 12:57pm

Karot Hydropower connects unit one to national grid. It is a 720 MW plant constructed on river Jhelum, #Pakistan , in collaboration with one of the largest state-owned #Chinese power companies, #China Three Gorges Corporation. #CPEC Global Village Space

https://www.globalvillagespace.com/karot-hydropower-connects-unit-o...


Pakistan’s first Hydel power generation project – Karot Hydropower – under the China-Pakistan Economic Corridor (CPEC) connected unit one to the national grid on 30 April, kick-starting the operations at full capacity, reported Developing Pakistan, a Pakistan based digital media platform. By connecting unit one of the Karot Hydropower, the project pumps 180 MW of electricity into the national grid. Karot Hydropower Project is a 720 MW constructed on river Jhelum, Pakistan, in collaboration with one of the largest state-owned Chinese power companies, the China Three Gorges Corporation, more commonly known as the CTG. The rest of the three units will be connected to the national grid in the upcoming months.

The project’s financial close was achieved in March 2017, and construction work began the same year. The mechanical, electrical, and other technical works of the project were completed around February 2022, and internal testing began in the same month. Work pertaining to transmitting power to the national grid was mostly completed by January however was not completed till April 30. The project is the first of three hydropower projects under China Pakistan Economic Corridor, and the estimated cost to get the plant operational stands at around $1.42 billion. According to the Managing Director of the Private Power and Infrastructure Board, the other two include “the 870MW Sukhi Kenari HPP and 1,124MW Kohala HPP.” Work on Sukhi Kerani is underway, whereas the construction of the Kohala Hydropower Project is yet to be initiated. The Kohala HPP is also being constructed on the Jhelum river, and a tripartite agreement was signed for its construction in June 2020; however, due to tax issues, the work on the construction site of the said river has still not begun.

It is pertinent to mention that according to the National Electric Power Regulator Authority state industry report 2021, Hydel sources of electricity generation account for 27.02 percent of the country’s electricity, significantly more than any other source except for thermal.

Separately, to address the energy demands of the country, Pakistani authorities have also engaged the World Bank to facilitate the set up of a 300 MW floating solar project at the Tarbela – Ghazi Barotha complex. The project’s projected cost is proposed to be around $346.5 million. Under the project, a 150 MW floating solar subproject will be deployed in the Ghazi Barrage headpond and another floating project of similar capacity at the Forebay of the existing Ghazi Barotha Hydropower plant. The project would greatly enhance the electricity supply and help meet the rising demand for electricity in a climate-smart manner.

Comment by Riaz Haq yesterday

Pakistan Private Sector Energy Project
@PFAN_PPSE
#Pakistan can get up to 20% of total power capacity from variable renewable energy simply by focusing on existing substations, mainly resulting in a series of small solar projects - according to ⁦⁦⁦⁦
@WorldBank


https://twitter.com/PFAN_PPSE/status/1529715190018760706?s=20&t...


https://blogs.worldbank.org/endpovertyinsouthasia/expanding-solar-a...


Rooftop solar can be delivered quickly and at a relatively low cost, while avoiding the need for additional transmission & distribution infrastructure.

Perhaps there can be a silver lining from the current load shedding--or planned power cuts due to insufficient supply--that is affecting the electricity sector in Pakistan: the immediate implementation of competitive bidding for new solar and wind capacity. For the last few years, the dominant narrative around the electricity sector has been one of “surplus capacity”, which has been used to justify postponing the procurement of new solar and wind. One of the concerns is that because the power sector must pay legacy fossil fuel generators regardless of whether they generate power (this is called “capacity payments”, for the capacity they provide to the system), adding additional capacity will further harm the financial viability of the sector. However, the current crisis illustrates the folly of such short-term thinking.

As highlighted in a report just published by the World Bank – “Variable Renewable Energy Competitive Bidding Study” – competitive bidding, whereby the government contracts for new power supplies through a reverse auction process based on the tariffs offered by different private sector developers, must start in 2022 to meet the requirements of the government’s Indicative Generation Capacity Expansion Plan 2021-2030. This envisages 2 Gigawatts of additional solar and wind capacity coming online from 2024 onwards, with further additions in subsequent years. Previous analysis published by the World Bank suggests that the IGCEP 2021-2030 targets are not ambitious enough, with scope for a more aggressive expansion of variable renewable energy. Considering the heavy reliance on expensive fossil fuels – which have dramatically increased in cost over the last few months – Pakistan would be saving money right now if it had been more ambitious in the past, even allowing for capacity payments.

Pakistan can get up to 20% of total power capacity from variable renewable energy simply by focusing on existing substations.
wind power

Implementation of competitive bidding will need to be taken forward by both the federal government (under the auspices of the Alternative Energy Development Board) and the provincial governments through a coordinated process. In addition to launching a competitive bidding process for the existing “Category 3” projects (those for which Letters of Intent have been issued under the previous policy regime), there is huge potential for quick wins by identifying substations that have surplus integration capacity and then designing a competitive bidding process involving a large number of such sites. As noted by the World Bank in our last study on this topic, the country can get up to 20% of total power capacity from variable renewable energy simply by focusing on existing substations, mainly resulting in a series of relatively small solar projects spread across all provinces.

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