Haq's Musings

Riaz Haq writes this data-driven blog to provide information, express his opinions and make comments on many topics. Subjects include personal activities, education, South Asia, South Asian community, regional and international affairs and US politics to financial markets. For investors interested in South Asia, Riaz has another blog called South Asia Investor at http://www.southasiainvestor.com and a YouTube video channel https://www.youtube.com/channel/UCkrIDyFbC9N9evXYb9cA_gQ

Showing posts with label fiscal deficit. Show all posts

Wednesday, July 10, 2024

Solar Power Boom in Pakistan

Falling solar panel prices and soaring rates for grid electricity are driving a renewable power boom in Pakistan. A second factor spurring the growth in clean energy installations is the requirement of major western apparel brands for garments and textile manufacturers to switch to clean energy. As a result, the solar panel imports in the country jumped from 2,800 MW in 2022 to 5,000 MW in 2023, in spite of stringent import controls imposed by the government. Solar imports are on track to reach 12,000 MW in 2024, according to solar installers. The total current installed generation capacity in Pakistan is around 40,000 MW. Grid electricity demand in Pakistan plunged in 2023 by nearly a sixth and a decline in 2024 would mark the first time in 16 years that annual electricity use has fallen consecutively, data from energy think tank Ember showed, according to Reuters.

Pakistan Solar Panel Imports. Source: PV Magazine

Omar Malik, the CEO of Shams Power, a major solar system contractor in Pakistan, was recently quoted by PV Magazine as saying: “In 2022, 2.8 GW of solar panels were imported into Pakistan. In 2023, about 5 GW, despite the import controls, and this year the prediction is for up to 12 GW”.

Aamir Hussain, chairman Pakistan Alternative Energy Association, told Arab News that solar panels of around 1,800 MW were purchased and installed last year, which was expected to jump to 3,000 MW this year due to the lower prices of the panels and increased customer demand.

“Pakistan will be spending over $3.5 billion [this year] on solar panel imports only as this doesn’t include import of batteries, inverters and other auxiliary items,” Hussain said. “Pakistan needs to follow consistent policies regarding renewable energy to meet its national and international obligations for the greenhouse gas emissions.”

Pakistan's Monthly Solar Imports in millions of US$. Source: Bloomberg

Japanese publication Nikkei Asia recently reported seeing residential building rooftops covered with solar panels in Islamabad. It also reported proliferation of rooftop solar in small towns and villages across the country. In particular, the Nikkei story mentioned the remote village of Kardigap with a population of 5,000, in Balochistan province, where solar panels are becoming more common on the rooftops of houses.

Responding to western apparel brands' demand for sustainability, a number of large Pakistani textile manufacturers are switching to clean energy, particularly solar. Tayyab Group of Industries (TGOIs), a major textile manufacturer, has recently signed an MOU to install a 20 MW solar system for its needs. Gul Ahmed Textile Mills Limited announced recently that it will install a 17.1 MW roof-top solar power plant to meet its energy needs.

While rapid uptake of solar is good news for the planet, it does create a major fiscal issue for the Pakistani government struggling to pay for power produced by the independent power producers (IPPs). The IPPs, many of them Chinese, secured a guaranteed return on investment indexed to the U.S. dollar, plus payment for fixed capacity charges -- covering their debt servicing and other fixed costs -- regardless of whether the power plants are operational, according to Nikkei Asia. As the demand for the grid power from the IPPs declines with rising solar, the taxpayers are still on the hook for the unused installed capacity charges running into billions of dollars. Higher power tariffs and taxes will only make the situation worse.

Capping Net Metering power and reducing payments for supplying excess power to the grid are not going to solve the problem either. It will only encourage more consumers to switch to rooftop solar and use less electricity from the grid. Self consumption of the rooftop solar power saves significant energy costs for the consumer.

It seems the only way forward for the Pakistan government is to renegotiate the terms with the IPPs to significantly reduce grid power costs to address the growing cost gap between rooftop solar and the grid power.

Sunday, July 10, 2022

India's Forex Reserves Fall As Foreign Investors Head For The Exits

India's foreign exchange reserves are falling rapidly as foreign investors flee and the country's trade and current account deficits widen. More than $267 billion worth of India's external debt of the total $621 billion is due for repayment in the next nine months. This repayment is equivalent to about 44% of India's foreign exchange reserves. This combination of investors' exodus, widening twin deficits and short-term debt repayments has caused the Indian rupee to hit new lows. Unlike China and other nations that have accumulated large reserves by running trade surpluses, India runs perennial trade and current account deficits. The top contributor to India's forex reserves is debt which accounts for 48%. Portfolio equity investments known as “hot” money or speculative money flows account for 23% of India's forex reserves, according to an analysis published by The Hindu BusinessLine.

India's Declining Forex Reserves. Source: Business Standard

Investor Exodus:

Foreign portfolio investors have pulled out a whopping $33.5 billion from equity and $2.1 billion from debt segments of Indian financial markets, for a total net outflow of $35.6 billion from October 2021 to June 2022, according to data compiled by the National Securities Depository Limited. In the first half of this calendar year, the total net outflows were $29.7 billion.

It's not just the FPIs leaving India; a number of multinational companies are also pulling foreign direct investment (FDI) from India. Several big names including German retailer Metro AG, Swiss building-materials firm Holcim, US automaker Ford, UK banking major Royal Bank of Scotland, US motorcycle manufacturer Harley-Davidson and US banking behemoth Citibank have chosen to pull the plug on their operations in India or downsize their presence in recent years.

Widening Deficits:

India's finance ministry has warned of a growing twin deficit problem, with higher commodity prices and rising subsidy burden leading to an increase in both the fiscal and current account deficits. India's June trade deficit widened to a record high of $25.63 billion, mainly due to a rise in crude oil and coal imports, from $9.61 billion a year earlier. India's April-May fiscal deficit was $25.8 billion.

Summary:

India's current level of forex reserves is enough for less than 10 months of imports projected for 2022-23. But the country has had a structural current account deficit which has been funded by large capital inflows. The accumulation of forex reserves has been due to surplus in the capital account. Since late February, the foreign exchange reserves have declined by $36 billion. India still has large forex reserves but its economy is in the same boat as other emerging markets that run large and worsening trade and current account deficits. With declining forex reserves, India is likely to face headwinds as the US Federal Reserves raises interest rates to fight inflation.