Pakistan’s electricity supply companies caused a staggering Rs660 billion loss to the national exchequer in the last fiscal year ending June 30, 2024, according to a recent Dawn report. To put this in perspective, this amount is 11 times the federal government’s Rs59.7bn budget for higher education last year. This comparison starkly highlights the depth of the structural problems afflicting Pakistan’s power sector.

The inefficiencies of electricity supply companies are draining national resources, leaving little fiscal space for the government to invest in the economic welfare of Pakistan’s 241 million citizens. While the power sector reforms are underway, even the most optimistic policymakers acknowledge that eliminating these losses is unlikely in the near future.

The inefficiencies of power companies, which lead to significant annual financial losses, create a snowball effect on the economy. They add to the mounting circular debt, further constrain fiscal space, drive frequent energy price hikes, and hamper industrial production. This not only reduces output but also makes goods more expensive, exacerbated by prolonged power outages.

Among the worst affected are small and medium enterprises, small shopkeepers, and information technology (IT) freelancers — a crucial source of much-needed foreign exchange — who rely on uninterrupted electricity and internet services to work from home or modest offices.

Unless the government accelerates reforms in the power sector and effectively addresses internet service disruptions, IT professionals will continue to emigrate

As of December 2024, Pakistan ranks a dismal 198th globally in internet speed, trailing behind countries like Palestine, Bhutan, and Libya, according to the World Population Review. Frequent disruptions in internet services further compound the difficulties faced by IT professionals, many of whom are now relocating to nearby Dubai in search of better facilities.

Unless the government accelerates reforms in the power sector and effectively addresses internet service disruptions, IT professionals will continue to emigrate, and export-oriented businesses will struggle to remain competitive in global markets due to high energy costs. This poses a serious threat to sustaining the growth momentum in exports of goods and services.

In the first five months of this fiscal year (July-November 2024), goods exports grew by 12.57 per cent to $13.69bn, while services exports increased by 7.91pc to $2.6bn. Maintaining this growth trajectory is crucial for narrowing the trade deficit.

In the first five months of this fiscal year (July-November 2024), goods exports grew by 12.57pc to $13.69bn, while services exports (from July to October 2024) increased by 7.91pc to $2.6bn. Maintaining this growth trajectory is crucial for narrowing the trade deficit.

During July-November 2024, the goods trade deficit stood at $8.65bn, with imports growing by only 3.9pc year-on-year. However, as the economy begins to expand and fuel prices rise amid growing instability in the Middle East, imports are likely to grow faster, putting additional pressure on the trade deficit.

Similarly, the services trade deficit for July-October 2024 totalled $993 million, with imports increasing by 2.41pc. As the economy recovers and is projected to grow by 3pc this fiscal year, according to the Asian Development Bank, services imports are also expected to rise. Thus, faster growth in services exports is essential to keep the deficit in check.

However, challenges remain. Poor performance in wheat and cotton crops threatens to slow the growth of goods exports, while the relocation of IT businesses to Dubai has introduced uncertainty in foreign exchange inflows from this critical segment of services exports.

Remittances from overseas Pakistanis ($14.76bn in July-November 2024) have now become the largest source of non-debt foreign exchange inflows, surpassing goods exports. However, escalating political turmoil in the Middle East, triggered by the fall of Bashar al-Assad’s regime in Syria and an immediate Israeli incursion along the Syrian border, presents grave concerns.

With over 55pc of Pakistan’s remittances originating from Gulf Cooperation Council countries, it would be optimistic to assume that these inflows will remain unaffected if military escalation spreads to countries like Saudi Arabia or the United Arab Emirates. Any disruption in these key remittance corridors would significantly impact Pakistan’s foreign exchange inflows.

The situation also hinges on how the incoming administration of US President-elect Donald Trump, set to take office on January 20, 2025, handles this crisis. (Remittances in November were already lower by 4.55pc than in October).

On the domestic front, some encouraging signs have emerged in Pakistan’s political landscape. The government and the main opposition party, PTI, have taken initial steps towards dialogue following the November 26 protest in Islamabad, which resulted in the tragic deaths of 12 PTI workers and half a dozen law enforcement personnel. Political stability is crucial for sustaining economic recovery and attracting foreign investment.

However, it remains too early to predict a breakthrough in these talks, given the unpredictable nature of Pakistani politics. For instance, the government’s proposed reforms of religious seminaries have sparked a backlash from Maulana Fazlur Rehman’s JUI and other religious parties.

If the government fails to placate both PTI and the religious factions, an alliance between them could pose significant challenges. Managing this potential coalition amid a rising tide of militancy and terrorism in Khyber Pakhtunkhwa and Balochistan would not only be politically daunting but could also result in severe economic repercussions. It’s time to tread carefully, both for the government as well as for the opposition political parties.

Published in Dawn, The Business and Finance Weekly, December 16th, 2024