The International Monetary Fund (IMF) asked Pakistan on Wednesday to plug unbudgeted Rs675 billion power subsidies with a mix of electricity tariff increase and other revenue enhancing measures, while finding serious deficiencies in the revised ‘Circular Debt Management Plan’ (CDMP) of Rs952 billion.
During the first review of the revised plan that was prepared by the Power Division, the IMF team also asked Pakistan to withdraw the unbudgeted electricity subsidies for exporters and other sectors, according to sources privy to the ongoing discussions.
The Power Division prepared the revised plan to eliminate the Rs975 billion circular debt that it had now projected as against the earlier commitment to the IMF to keep the flow zero. However, the plan did not pass through the IMF scrutiny due to faulty assumptions and heavy reliance on getting Rs675 billion more subsidies.
The IMF’s first set of observations may increase the troubles for the government that is eying to satisfy the lender with a mix of tariff increase and additional subsidies. Pakistan’s economic survival hinges on the success of these 10-day long talks after it could not receive any support from foreign nations.
The IMF’s view was that due to almost negligible fiscal space, there was no room for any additional subsidies, therefore, it asked the government to bridge this Rs675 billion gap with increase in electricity prices and other measures, said the sources.
The global lender asked the government to come up with a proposal to increase tariffs, including withdrawal of the exporters package, which is estimated to cost Rs143 billion in this fiscal year. Out of Rs143 billion, Rs123 billion are unfunded, the sources said.
Prime Minister Shehbaz Sharif had announced the preferential untargeted subsidy for exporters in October, which has now created more troubles for his government and the people.
At the time of the budget, the government kept only Rs355 billion power subsidies for the current fiscal year. In order to manage the flow of the additional circular debt, the Power Division has now sought Rs675 billion more subsidies, bringing the total needs to over Rs1.03 trillion.
However, this did not go well with the IMF. The Express Tribune reported on Wednesday that the revised CDMP revealed that a staggering Rs952 billion more would be added to the circular debt in a ‘business-as-usual’ move.
The government has proposed the imposition of three separate quarterly tariff adjustments, ranging from 69 paisas per unit to Rs3.21 per unit from February to May this year to reduce a gap of Rs73 billion, details showed.
The plan appeared unrealistic, as it had been made on the assumption that the rupee-dollar exchange rate was Rs232 per dollar and 16.84% Karachi Interbank Offered (KIBOR) rate. The current exchange rate stands at Rs270 and KIBOR is close to 18%.
The sources said that the IMF did not appear satisfied with the Power Division’s performance that could not improve the sector’s finances during the past six months. Instead of honouring commitments, the Plan showed about Rs223 billion to Rs275 billion further increase in the circular debt despite increasing tariffs in coming weeks.
The circular debt was Rs2.253 trillion at the end of the last fiscal year – a matter of concern for the IMF. After the exchange rate, the power sector is the second non-negotiable area for the IMF where the government may not be able to get any major relief against its many failures that also date back to the PTI era.
The government has given a gradual implementation plan for the removal of agriculture tube-wells subsidies, which seeks their complete withdrawal by mid of 2025. However, the IMF did not agree to this plan.
Since fiscal 2018-19, the K-Electric has stopped making payments against power purchases due to lapse of the Power Purchase Agreement. The K-Electric’s outstanding payables to the government have increased to Rs490 billion as of December 2022. The estimated addition in the circular debt due to non-payment of K-E dues during the current fiscal year is Rs172 billion, according to the Power Division.
The IMF and the World Bank are pushing Pakistan to sign the agreement with the K-E but the Power Division informed the IMF that the deal could be signed in the fourth quarter of this fiscal year. The Fund was told that the gap in the consumer reference rate and projected cost of supplying power would be mitigated through timely tariff increases.
The IMF was told that only 0.58% improvement is expected in the line losses, which are now estimated at 16.27% and would result in mere Rs12 billion saving.
Compared to 16.27% projections, the Nepra has set the target at 11.7%. The government is showing the total average 0.58% improvement in areas where its writ is very weak.
After the recoveries of the bills dipped to 83%, the government assured the IMF that it will be able to increase the ratio to 90% by end of this fiscal year. Still, the Iesco recovery, once considered very efficient, is shown at 86.4%.
The Qesco recovery is shown only at 33.7%, Sepco 63.8% and Hesco 75%. Due to low recoveries by the power distribution companies, the government sustained Rs180 billion losses in the previous fiscal year.
The revised plan claims that the monthly circular debt reports are published on the Power Division on 18th of every month. Ironically, the last report that is available on the ministry’s website is from October 2021.
The government informed the IMF that It would impose quarterly surcharges to reduce another Rs73 billion in the flow of the circular debt. In any given time from now till June, there will be an additional Rs3.62 to Rs6.14 per unit surge in the cost of electricity, excluding the impact of the pending FCAs.
Earlier, the government had planned that circular debt will be lowered to Rs1.526 trillion through a blend of reductions – Rs284 billion in the old stock and further reducing the flows.
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