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January 17, 2019

Low electricity cost is critical to growth

Electricity cables./FILE
Electricity cables./FILE

With the reduced short rains between October and November, water levels in the dams used in the production of hydropower are reportedly low. The effect is more reliance on the more expensive alternative geothermal and diesel electricity sources. For the domestic consumers, this increases the cost of living as more income is allocated to electricity bills and increased cost of essential goods. For the industry, the cost of doing business will increase, leading to lower profits and increase in the price of goods. Already, local industry is at a competitive disadvantage from cheap imports from countries with cheaper electricity. We have also witnessed relocation of industries to countries with cheaper power, such as Egypt. The overall effect is loss of employment opportunity, and a drag on economic growth.

It is well accepted that economic development is closely related to the price of electricity. Lower price of electricity stimulates economic development. Lowering the price of electricity, therefore, continues to be one of the core issues in the pathway to an industrialised economy. The plan to reduce the cost of electricity by 47 per cent in the next three years is therefore a priority. It will reduce the cost of doing business and stimulate economic growth.

The recent increase in access to power, particularly in the rural areas, has not been matched by an increase in cheaper power. This has the unintended consequences of increasing the overall cost, especially for heavy users such as manufacturers.

A look at the development path of China and Asian tiger countries of Korea, Singapore, Hong Kong, and Taiwan show that low price of electricity was core to their industrialisation. Adoption of low-cost power policies was particularly important in the initial stages of growth. This enabled them to adopt export-lead economic growth.

According to research estimates, energy costs worldwide on average constitute 8-10 per cent of the cost of production for most goods, most of which comes from electricity. However, for the more energy intensive industries, energy costs may constitute 15-20 per cent of the total production costs. This means an increase in electricity costs has a significant increase on the cost of production. Some of the increased cost of production is passed on to the consumer in increased prices, and the rest absorbed by industry in form of reduced profitability.

Going forward, the industrialisation of the economy is highly dependent on how soon the price of electricity can be reduced. This calls for more capital and technology investment in electricity production

Karen Kandie is a financial and risk consultant with First Trident

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