Power subsidies: Govt spends two-thirds of budgeted amount in three months

All financial benefits from the release of Coalition Support Fund have been wiped out.

ISLAMABAD:

The government has spent Rs119 billion in power subsidies in just three and a half months, squaring off all financial benefits the country had received under the Coalition Support Fund due to the disbursement of $1.2 billion (Rs113 billion) in a single tranche by the United States. The subsidies amount to twice the subsidies provided to the power sector in the corresponding period of the previous fiscal year.

One of the reasons behind the massive surge in the power subsidies bill was the payment of Rs24 billion made to independent power producers, made on the directives of the Supreme Court of Pakistan, said sources in the finance ministry.

They added that the total bill also included payments on account of power differential tariffs, while some of Pakistan State Oil’s arrears were also cleared to avoid a default on international oil payments.

The lavish subsidies are likely to take a heavy toll on the budget. The government had budgeted Rs185 billion for power subsidies in fiscal 2012-13, and the amount paid so far comes to roughly two-thirds of the total allocated budget, suggesting the possibility of a huge overrun before the year is done.

For the last fiscal year, the government had budgeted only Rs147 for power subsidies, but had closed the year paying out roughly Rs500 billion under the head. The unrealistic budgeting had resulted in an historical budget deficit of Rs1.78 trillion, or 8.53% of the GDP.

Despite nose-diving revenues, the government had seemed to consolidate its fiscal position during the first quarter of the current fiscal year. The $1.19 billion received from the US in one tranche had helped economic managers keep the budget deficit at manageable levels so far. Now, it has been revealed that the money – obtained after frantic diplomatic lobbying and appeasement – has been used to fill a bottomless hole. It is feared that the government’s inability to implement much-needed reforms in the power sector will now result in an additional burden on taxpayers.

Sources said that according to initial estimates, the budget deficit in the first quarter (July-September) is expected to remain slightly over 1% of GDP. In the first quarter of the last fiscal year, the deficit was 1.3% of GDP. The improvement was primarily because of CSF payments.

Till October 2012, the federal government’s net borrowings to finance the deficit stood at Rs272 billion – equivalent to 1.14% of GDP.

A finance ministry official said the Federal Board of Revenue (FBR) has bagged Rs403 billion during the first quarter of the current fiscal year. The provisional collection figure is Rs22.2 billion, or 5.8%, higher than revenues generated in the same period during the previous fiscal year: lower than even the inflation rate, suggesting massive tax slippages.

For the current fiscal year, the government has imposed a Rs2.381 trillion tax target on the FBR. The International Monetary Fund, in its recent assessment, has said that the FBR can collect, at best, Rs2.23 trillion – around Rs151 billion less than the target.

The likely shortfall in revenues and soaring power subsidies will push the annual budget deficit beyond the targeted 4.7% of GDP, said the IMF. It has forecasted that the budget deficit will actually fall in the range of 6-6.3%.

The power sector has been the single biggest drain on resources over the past four and a half years: the government has paid roughly Rs1.2 trillion in subsidies to the sector over the period. To put things in perspective, the amount is more than the funds needed to build the Diamer Bhasha Dam.

Published in The Express Tribune, October 18^th, 2012.