Sunday, September 2, 2012

Load-shedding’s load on the Nepali economy

It was published in Nepali Times, ISSUE #620 (31 AUG 2012 - 06 SEPT 2012).

Load on the economy

Besides the inconvenience, long hours of load-shedding will severely stunt the country's economic growth

Looking at the poor monsoon rains, rising demand and close to stagnant electricity production, Nepal Electricity Authority (NEA) projected that without immediate remedial measures load-shedding during winter could reach as high as 20 hours per day.

Prime Minister Baburam Bhattarai convened a meeting of stakeholders and asked them to limit load-shedding to 12 hours like last year. The Ministry of Energy (MoE) then floated a proposal whose immediate implementation would help the government reach its target. The plan includes construction of a 15 km transmission line to carry electricity from India during winter, operation of multi-fuel plants in Duhabi and Hetauda, construction of the Khimti-Dhalkebar transmission line, reduction of leakages, purchase of additional electricity from India, and expediting work in hydro projects.

However, as it stands now, the reality is that load-shedding will definitely go beyond 12 hours. There are no quick fixes to our power crisis unless production catches up with soaring demand. Meantime, as in previous years, hours of darkness will continue to erode the competitiveness of Nepali goods and services, weaken the industrial sector, widen trade deficit, and jeopardise fiscal balance.

Currently, electricity demand during peak time is around 1000MW, but supply is barely 700MW during summer and 400MW during winter, which includes total NEA production from hydro and thermal, purchase from the private sector, and import from India.

Of the total availability, NEA supplies 55 per cent (including both hydro and thermal), private sector contributes 27 per cent, and 18 per cent is imported from India.

As a result of increase in purchasing power boosted by remittances, trading services are booming. Furthermore, new consumers, which doubled between 2005 and 2011, seeking electricity from the grid are also increasing annually. While demand increases by around 100MW every year, electricity production is moving at a snail's pace.

First, due to the inadequate supply of electricity, firms will be forced to depend on petroleum products (especially diesel, which carries the most weight in NOC's losses and whose consumption more than doubled between 2007-08 and 2010-11) to power up their factories and offices. This will increase the cost of production and erode competitiveness of Nepali goods and services. Since cost of domestically produced goods might be higher than the cost of imported goods of similar nature, industrial activities may continue to further slowdown. Besides, power generated from diesel run generators can fulfil only 25 per cent of total electricity demanded by firms.

Nepal is already ranked as the least competitive economy in South Asia with high cost of doing business. According to Enterprise Survey (ES) 2009, lack of electricity is the second biggest obstacle to investment and is inflicting losses of 27 per cent of annual sales.

Second, exports, especially those of the manufacturing sector, will continue to be hit by mounting costs, leading to further slowdown of manufacturing output, which has already declined from 7.6 per cent of GDP in 2004-05 to 5.8 per cent of GDP in 2011-12. Meanwhile, new investments except for in services and hydropower sectors might decline as in the past. Worse, some of the existing firms will go out of business and most will operate below potential. All of these will hit economic activities and employment opportunities.

Third, the rise in demand for petroleum products will mean long queues at petrol pumps and rationing of LPG cooking gas. The NOC will see its balance sheet deteriorate as it is forced by the government to subsidise diesel, kerosene and LPG. The increasing import of petroleum products, which was about Rs 96 billion against total merchandise export of about Rs 65 billion last year, will further widen the trade deficit. Generally, consumption of petroleum products is inversely related to the supply of electricity.

Fourth, the government will have to fork out more money for petroleum subsidies (around Rs 10 billion last year), putting extra pressure on fiscal deficit, which stands at about four per cent of GDP. A portion of tax revenue collected from taxpaying citizens will unfairly be used to subsidise diesel consumed in large quantity by those who can afford it in the first place, making it the most off-target subsidy.

Based on the current pace of construction, demand will continue to outstrip supply at least until 2017. Excessive politicisation of the hydro sector and inefficiencies within NEA have been the two biggest hurdles so far. And unless construction of hydro projects and new investment are ratcheted up drastically, the outlook remains grim.