UNCLAS SECTION 01 OF 02 ISLAMABAD 003136

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PREL PK
SUBJECT: THE NEGATIVE ECONOMIC IMPACT OF PAKISTAN'S ELECTRICITY
CRISIS

REF: ISLAMABAD 2996


1. (SBU) Summary: Small and medium-sized businesses across Pakistan
are feeling a severe economic impact from the country's rolling
blackouts. Pakistan's acute electricity deficit - compounded by
rising fuel, material, and labor costs - is slowing the economy, and
small and medium enterprises are particularly hard hit. Media
report that small and medium companies' trade and commercial
activities are down 80 percent due to continued and prolonged
blackouts. Industry leaders point to prolonged electricity
blackouts as the primary cause for the country's economic turmoil
and warn that, without government intervention, national revenues
could go down 70 percent as a result of the industry slowdown. End
summary.

Quantifying the Impact
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2. (SBU) In Karachi, Pakistan's industrial and business hub,
prolonged electricity blackouts which are known locally as load
shedding, occur up to 16-18 hours per day. Every city and village in
Pakistan suffers from varying degrees of prolonged blackouts each
day and the country is currently facing a total shortfall of
4500-4750 mega watts. Without power, machines in factories may only
be operable for two hours a day, leaving many workers inactive for
the greater part of their 12-hour shifts. Business owners,
meanwhile, continue to pay full wages and overtime, even as
production slows to a halt. As a result, small and medium
enterprise activities are down 80 percent, operating at 20 percent
of capacity. According to the September 16 edition of "The Business
Recorder," as a result of electricity shortage to industries, the
national treasury bears over PKR 100 million (USD 1.3 million) in
losses per day due to lost production revenues and electrical fees.
In retail, sales are also down 80 percent.


3. (SBU) Mr. Sabur Ahmed, an energy specialist at the Karachi
Chamber of Commerce and Industry, said that the reduction in the
work hours due to load shedding is also negatively affecting large
scale industry as it generally outsources production of goods to
small scale industry. For example, the automobile industry buys
auto parts from small scale vendors, which are producing below
capacity. According to Mr. Ahmed there has been a 40-45 percent
decli

ne in the overall industrial production due to load shedding.


4. (SBU) General Secretary Anis-ul-Haq from the All Pakistan Textile
Mills Association, a collection of representatives from spinning,
weaving and composite textile units, said that 30 percent of the
textile units use electricity provided by the Water and Power
Development Authority (WAPDA) and are adversely affected during the
severe load shedding. These production losses, coupled with the
shift of export houses to India and Bangladesh, have contributed to
a 20 percent drop in the quantity of textile exports and a 3 to 4
percent drop in the dollar value of textile exports in FY2007-08. In
addition, Mr. Haq observed that the 70 percent of the textile
industry, which is using gas based power houses rather than WAPDA
electricity, will be negatively affected during winters due to gas
load shedding.


5. (SBU) According to Zulfikar Thaver, President of the Union of
Small and Medium Enterprises (SME) and member of the National
Committee on SMEs, there has been a 50 percent decline in SME
production due to power outages. He also noted that while there have
not been any large scale lay offs in the SME sector as of yet, loss
of employment is inevitable.

Stitching in the Dark
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6. (SBU) One example of an industry hit hard by the power cuts is
Pakistan's tailoring business. Ramadan is typically a popular
season for clothing purchases, as Pakistani consumers ready for the
Eid holiday. This year, however, tailors in Islamabad report that
they are accepting fewer orders, as power outages for 6-8 hours a
day severely impact productivity. As a result, tailors in Islamabad
report that business is down 40-50 percent compared to this time
last year. Rising material costs (a reported 15-20 percent for
local fabrics and 30 percent for imported fabrics) compounds the
financial challenge for tailoring businesses, in addition to high

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power and fuel costs. Rising operating costs have forced tailors to
raise prices for Pakistan's national dress, the shalwar kamiz, by
PKR 50-100 since last year. As a result, more consumers are turning
to the readymade market, pushing those prices up as well. The
blackouts are affecting not only full-fledged tailoring businesses,
but also freelance tailors, usually women, who stitch clothes at
home to supplement household income.

Electricity Tariff Increase
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7. (SBU) The challenge to small and medium enterprises will only
intensify once the electricity tariff increase (an average of 31
percent) goes into effect in October. The GOP has also announced an
additional 30 percent increase will be necessary to eliminate
electricity tariffs. Industry leaders warn that the spike in power
costs could lead to an increase in electricity theft. They also
point out that the tariff increase presents a veritable catch-22: as
the trade deficit widens, feeding inflation, the government
increases the electricity tariff to grow revenues, but the tariff
increase will also reduce businesses' productivity, in turn slowing
the economy.

Comment
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8. (SBU) Post notes that comprehensive information on this subject
is not broadly available to provide scientific data and analysis.
The figures and information reported here are anecdotal evidence as
provided in news media and conversations between Embassy officers
and the industry, to illustrate the economic impact of the
electricity crisis. With power outages continuing across every
region of the country and impacting every demographic, frustration
among business leaders and average citizens is increasing. With no
quick fix available, energy experts predict that power outages will
increase in the upcoming winter months as water levels drop and
independent power producers reduce production due to reduced
payments from the government as fiscal resources deplete further.


9. (SBU) Comment continued: Many small and medium-sized businesses
in Pakistan feel they are facing a financial crisis, as blackouts,
security concerns and the country's overarching financial crisis
brings productivity to dangerous lows. Larger industrial companies
are better able to cope with the persistent load shedding, as they
can afford generators to produce their own electricity during
blackouts but they too are feeling the economic pinch since the
local price of diesel is increasing as subsidies are reduced.
Industry leaders warn that if current trends continue, local
industries will be forced to shut down completely, and national
revenues could go down as much as 70 percent. Government steps to
reduce rising trade imbalance will certainly be offset by an
inevitable decrease in exports as manufacturing slows due to
increasing energy shortfalls. End comment.

PATTERSON