MAJOR ENERGY CRISIS FEARED

Pakistan is most likely to face a major energy crisis in natural gas, power and oil in the next three to four years that could choke the economic growth for many years to come, official estimates and energy experts suggest. Pakistans total energy requirement would increase by about 48 per cent to 80 million tons of oil equivalent (MTOE) in 2010 from about 54 MTOE currently, but major initiatives of meeting this gap are far from turning into reality, said a former petroleum minister on condition of anonymity for the simple reason that he had also served the present government. Major shortfall is expected in the natural gas supplies, he said. According to official energy demand forecast, he added, the demand for natural gas, having about 50 per cent share in the countrys energy consumption, would increase by 44 per cent to 39 MTOE from 27 MTOE currently. Partly contributed by gas shortfalls, the power shortage is expected to be little over 5,250MW by 2010, he said, adding that the oil demand would also increase by over 23 per cent to about 21 million tons in 2010 from the current demand of 16.8 million tons. This would leave a total deficit of about nine million tons of diesel and furnace oil imports, he said. Since the gas shortfalls were expected to be much higher, the country would need to enhance its dependence on imported oil, thus increasing pressure on foreign exchange situation, he added. Last years oil import bill amounted to about $6.5 billion compared with about $3.5 billion in 2004-05, mainly because of higher international oil prices - a burden expected to be even higher in future as a result of growing Middle East crisis. Current years oil import bill has again been projected by the government at about $6.5 billion on last years average prices, which have started to rise in the recent days. According to the former minister, the government had planned five major initiatives to meet these energy requirements. They included three gas import pipelines, Gwadar port as energy hub and LNG import. However, four of these measures, including the three import pipeline projects, show no signs of progress for various reasons while concentration on energy facilities in Gwadar would chiefly depend on security situation, besides oil and gas import pipelines.

Planning Commission sources said the government had planned to add an overall power generation capacity of about 7,880MW by 2010. Of this, about 4,860MW is to be based on natural gas, accounting for 61 per cent of capacity expansion. IPRI Fact file. However, the gasbased power expansion of about 4,860MW would remain in doubt since these estimates were based on gas import options for completion in 2010, 2015 and 2020, said the sources. The fifth initiative of LNG import was on schedule and would start delivering about 0.3 billion cubic feet of gas (BCFD) by 2009 and another 0.5 BCFD by 2015, said the sources. Petroleum ministry officials are not ready to speak on record about gas import options and resultant overall energy shortfalls because of recent political developments on Iran-PakistanIndia pipeline project and security situation in Afghanistan and non-certification of gas reserves in Turkmenistan. According to World Bank estimates, a demand gap (supply shortage) of about four per cent of the total demand is expected in 2010. Even though this gap would be met by LNG imports, it would again increase to 20 per cent of the total demand. The bank said the indigenous gas supply would fall from 32.6 MTOE in 2010 to 20.7 MTOE in 2025 while the gas supplydemand gap would rapidly increase as demand is expected to grow continuously, quadrupling in 2025. As per the World Bank estimates, the gas imports will represent almost 67 per cent of natural gas supply in 2025. One can, therefore, gauge the quantum of shortage in case import pipelines are not materialized. Pakistans gas reserves are 32.8 TCF at present, with reserve-production ratio in the order of 27 years, considering that domestic production does not grow substantially. Power sector demand represents 41 per cent of total gas consumption, general industries 24 per cent, fertiliser 7.8 per cent and domestic-commercial 22.8 per cent, cement 1.5 per cent and CNG 2.8 per cent. Demand growth has been up to 8.5 per cent in recent years and is expected to be seven per cent with power industries and domestic consumption accounting for 82 per cent. Gas demand already displays seasonal pattern with national demand growing in winter beyond transmission capacity. Therefore, supplies to large users mainly industries and power plants are curtailed during winter months to ensure supplies to domestic, commercial and small industries. Annual production at present is about 1.16 TCF.

Inflation in Pakistan
1. Introduction
The prime objective of SBPs monetary policy is to deliver price stability to support the Governments economic objectives of growth. Price stability is defined by the Governments inflation target, which is announced each year in the annual budget statement. The current year inflation target is 9.5 percent set by the government which is expressed in terms of an annual rate of inflation based on the Consumer Price Index (CPI). Pakistans economy is facing double digit inflation for last several years and this high inflation has an economic cost. It undermines the economy's ability to generate long-lasting gains in output, incomes, and employment. It creates uncertainty for consumers, businesses, and investors, and erodes the value of incomes and savings. High inflation and expectations of high inflation also encourage speculative activities rather than investments that increase production capacity. A credible commitment by the monetary authorities to keep inflation low and stable provides a climate conducive to sound economic decisions. It also leads to lower interest rates, supporting productive investments that allow the economy to grow at a sustainable, non-inflationary pace over time and to generate higher incomes and new jobs. In Pakistan, combinations of factors have contributed to push up inflation for last several months. These include government borrowing from SBP to finance deficit, continuously rising energy and food prices and low policy credibility. These factors are also contributing about high inflation expectations in the future. According to survey results, tight monetary policy is hardly successful to meet the inflation target.

2. Inflation Expectations
In the first half of fiscal year 2011, there has been strong upward pressure on inflation in Pakistan because of high food prices and unrestrained borrowing of government from SBP. CPI inflation was at 12.3 percent in July 2010, was 15.7 percent in September 2010 and 15.5 percent in December 2010. Similarly food inflation rose from 12.8 percent in July 2010 to 20.4 percent in December 2010. General CPI inflation and food inflation fell down to 12.9 percent and 17.7 percent respectively in February 2011 which is good news. Despite this improvement in inflation, public is still expecting higher inflation.

In current PIDE Inflation Expectations Survey for March 2011, respondents are expecting 15.5 percent inflation for April 2011 and 16.4 percent for May 2011.Results also indicate that expected inflation will remain about 17.0 percent for the next six months and 16.6 percent for the current year,

According to respondents, persistent high inflation, policy credibility, political crises in some of the oil exporting countries, implementation of RGST and prevailing law and order situation in the country are fueling the public expectations about future high inflation. As shown in Figure 2, persistent high inflation and creditability of the policies are the major sources of inflationary expectations followed by political crises in oil exporting countries (24.7percent), law and order situation (15.9 percent) and implementation of RGST (15.1 percent). Respondents think that inflation in Pakistan is largely being driven by food prices, bad governance and oil prices. As shown in Figure 3, according to 32.2 percent of respondents, food prices and bad governance are the main driving forces of current high inflation followed by oil prices (28.9 percent).In addition to these, money supply, utility prices, fiscal deficit and wages are also considered as important determinants of inflation in Pakistan (Figure 3).

3. Monetary &, Fiscal Policies and Interest Rate

Results of PIDE Inflation Expectation Survey reveal that supply shock is the major source of inflation in Pakistan, so the only tight monetary policy is not the solution of the problem. Monetization of fiscal deficit is also contributing factor in inflation. In response to the question regarding the effectiveness of the policy to curb inflation, vast majority of the respondents (81.7 percent) suggest that both monetary and fiscal policy should be used to curb the inflation. Experts believe that government should avoid the monetization of fiscal deficit to control

inflationary pressure. About 50 percent respondents are in favor of easy monetary policy and 30 percent prefer tight monetary policy for revival of the economy (Figure 4).

Exchange Rate
Exchange rate is an important channel through which monetary policy affects output and prices. Higher interest rates make domestic financial assets attractive and this induces the appreciation of the domestic currency. But due to the lack of competiveness of the external sector of the economy, domestic currency is continuously in pressure and 61.5 percent respondents are expecting that domestic currency will depreciate in the next six months. About 20 percent of the respondents expect that exchange rate will appreciate in the coming months, while remaining is of the view that there will be no change in it (Figure 6).

4. Growth Rate and Unemployment

Survey results indicate that experts are skeptical about growth rate and expecting high unemployment in the next six months. About 47 percent are of the view that growth rate will remain the same in coming months whereas 39.1 percent are expecting low growth in the coming months (Figure 7). Majority of the respondents considered that government policies are ineffective to boost growth and reduce the unemployment in the country. Vast majority (68.8 percent) of the respondents are expecting high unemployment in the next six months.