$6.2b loan package: Inefficient power sector to figure high in talks with IMF

Pakistan, IMF to begin last round of performance review in Dubai on Wednesday

ISLAMABAD: The government’s failure to stop the power sector haemorrhage during the last three years is going to be on top of the agenda in the last round of talks with the International Monetary Fund (IMF) under the $6.2 billion bailout package, which will begin on Wednesday in Dubai.

The government has met most of the targets set for the April-June 2016 quarter with the exception of curtailing the budget deficit to Rs1.292 trillion during the last fiscal year and notifying multi-year tariffs for three power distribution companies.

The multi-year tariffs could not be notified for the Faisalabad Electricity Supply Company (Fesco), Lahore Electricity Supply Company (Lesco) and Islamabad Electricity Supply Company (Iesco).

The IMF had set July 15, 2016 as the revised deadline for notifying the tariffs, which the government missed.



Despite that, the talks are expected to remain smooth and the IMF is likely to ignore the failures, according to sources in the Ministry of Finance.

This will be the last round of talks and its success will pave the way for release of the last loan tranche of about $102 million.

The State Bank of Pakistan (SBP) has met the conditions for increasing the Net International Reserves to $11.1 billion by June 30 and restricting the Net Domestic Assets to Rs2.731 trillion, say sources.

The structural benchmarks for notifying the income tax offences as predicate offences under the Anti-Money Laundering Act of 2010 and updating the circular debt elimination plan have also been met.

Although the government claims to have reduced the budget deficit from 8.2% of GDP in 2013 to 4.5% by June 2016, one of the main sources of higher deficit - the losses incurred by an inefficient and poorly governed power sector - remains unaddressed.

The 4.5% deficit, which was above the IMF target, did not include Rs661 billion worth of circular debt.

The power sector, which was bleeding at the beginning of the IMF programme in September 2013, continued to bleed, but at a slower pace due to reduction in crude oil prices in the international market. That, according to the sources, will remain a contentious issue during the last round of talks.

“The circular debt stood at over Rs661 billion including Rs335 billion in arrears,” said an official of the Ministry of Water and Power.

“Even in the last round, there will be talks on how to eliminate the circular debt as the government has submitted a revised plan to the IMF on the 15th of this month,” he added.

In the last three years, the government has fared better in some areas by managing books, for instance, showing better foreign currency reserves by borrowing from the market.

However, in critical areas like taxation, energy and improving business climate it could not reverse the depressing trend.

The tax base in the just ended fiscal year contracted almost 15%, although the government claimed it had achieved the revenue collection target of Rs3.104 trillion. However, there was marginal improvement in electricity bill recoveries and reduction in line losses.

It is the second circular debt elimination plan in less than a year that the government has submitted, as the 2015 plan could not be fully implemented.



The plan adopted in late 2015 included steps to improve collections and reduce operating costs, losses and price distortions in the tariff structure.

In his communiqué to the IMF, Finance Minister Ishaq Dar admitted that one of the factors behind non-implementation of the circular debt reduction plan was “delay in the privatisation of power distribution companies”.

The government had promised to the IMF to utilise the proceeds of privatisation in retiring the Rs335 billion circular debt arrears.

It now plans to list minority stakes of power distribution companies through initial public offerings, starting with Fesco, and to utilise the proceeds to reduce the outstanding circular debt.

The government has also been constantly forcing Nepra to relax further the conditions for reducing line losses and improving electricity bill recoveries instead of improving the governance of distribution companies.

Published in The Express Tribune, July 26^th, 2016.

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