OF late, the commercial and industrial sectors have been uneasy over their cost of production as a result of ‘oil-flation’.

In particular, the export-oriented sector including the textile industry has been complaining of their products loosing competitiveness in the international market because of higher cost of doing business as a result of increase in gas and power rates in March this year.

The unprecedented hike of 40 per cent in electricity rates allowed last week for industrial and commercial consumers has added to their woes. The All-Pakistan Organisation of Small Traders and Cottage Industries has claimed that over 4,000 business units have closed down and more could face the same fate with the hike in power tariff. Domestic middle class would be no exception as their rates rise up to 60 per cent.

No doubt, the increase in power rates was inevitable with unparalleled rise in fuel rates and resultant surge in energy-related corporate sector receivables. Yet, one of the major causes of over Rs400 billion circular debt — ever rising system losses in the power sector — has remained unaddressed. Commonly known as system losses, the power sector has miserably failed to reduce this pilferage that in some cases continues to stay above 35 per cent. Estimates suggest that one per cent system loss in Wapda’s system translates into Rs3 billion.

Instead of doing anything on this account, the PPP-government has adopted the easiest option of burdening the consumer, creating an ideal scenario for cost-push inflation at a time of perpetual demand-pull inflation as a result of the wide demand and supply gap, playing havoc with the purchasing power of the general public.

Transportation and energy for industry, trade and business will also cost more as oil, gas and power increase in price. The result is a huge increase in business costs, and this cost is passed on to the consumer. The businesses then shed jobs in order to cut costs, although the government is currently in the process of advertising public sector posts of more than 30,000.

According to economists, a large increase in petroleum price leads to increase in the price of most products raising the rate of inflation. This can then raise the normal or built-in-inflation, reflecting adaptive expectations and wage and price spiral, so that a supply shock can have persistent effects.

While the government claims increased tariff will discourage excessive use of electricity by consumers, help save power and end load-shedding. The Federation of Pakistan Chamber of Commerce and Industry (FPCCI) says that hike in power tariff will increase cost of production which will eventually lead to cut in export orders and badly hamper industrial production.

The FPCCI members are of the view that increase in power tariff has created unrest among the industrial sector, especially the manufacturers who already are hard hit by high input costs including gas, petrol, electricity and costlier imports of raw materials because of weakening rupee.

The increase in electricity rates coincided with the launch of the World Bank’s “Doing Business 2009” report that said Pakistan slipped three positions among the 181 economies and stood at 77th position in providing an environment conducive to investment as it did not introduce any reforms in 2008.

Pakistan ranked 74th a year before, which meant the cost of registered businesses increased in one year when compared with other economies.

Pakistan is placed at the 93rd position on dealing with construction permits due to large number of days involved in the procedure. A businessman has to spend more than seven months or 223 days to get a construction permit. To transfer property from one business entity to another, as many as 50 days are required that consumes precious time, says the report. Overall, Pakistan grabbed 97th place on registering property indicator.

The bank believes that by reducing administrative cost of doing business, the countries that are facing problem of high electricity cost could reduce at least one barrier to the business. The government, in fact, did the other way round and increased the electricity costs.

Pakistan got the highest position in South Asia on protecting investors, scoring 24th position but remained the worst performer in enforcing contracts where it stood at 154th number. It takes 32 months or 976 days in contracts’ enforcement.

Employing workers was the second worst and paying taxes was the third worst indicator. A businessman needs 47 days or 560 hours to pay his taxes in a calendar year. The report says that total tax rate, as percentage of profit is 28.9 per cent.

The country performed moderately on getting credit indicator and scored 59th position. Trading across the borders indicator won 71st place. On the last indicator, closing a business, Pakistan is placed at 53rd position. It takes about three years to shut a running business. The recovery rate is measured at 39.2 cents per dollar.

On top of this, the government’s decision to borrow from the banking industry at exorbitant interest rates to ensure fuel supplies to the power generation companies and independent power producers would clearly add to the overall borrowing cost, obviously to be repaid by the future generations. A case in point is arrangement of over Rs60 billion syndicated loans for oil companies for price differential claims would cost over Rs14 billion extra to the general public.

Also, another Rs30 billion loan being arranged for public sector power companies to clear outstanding to the IPPs would cost about Rs4 billion in additional costs to the national exchequer when these are repaid after four-five years.

This is a vicious circle that has engulfed the poor people for no sin of their own. The government has to introduce a prudent economic policy based on inputs from all segments of society, instead of burdening the public, if it has any respect for the February 18 mandate.