Solarisation, falling power demand worry IMF
The International Monetary Fund (IMF) raised concerns on Monday about Pakistan's strategy to address the mounting challenges of declining electricity demand due to increased solar panel adoption and surplus imported gas owing to weakened economic demand.
The IMF's queries arose on the first day of the premature talks, aimed at averting any risk to the $7 billion bailout. The global lender raised questions about the sector, focused on plans to manage the solarisation challenge and the surplus imported gas, according to the people privy to these discussions.
Pakistan also proposed to the IMF to let the in-house power generation by the industries continue on imported gas beyond January 2025 by fully recovering the cost. However, the IMF's response was muted.
Pakistan has committed to cutting the gas supplies by January and shifting the industries to the national grid a condition that has frustrated the industrialists amid the increasing cost of doing business.
The issue of over Rs400 billion unrecovered dues to Gas Infrastructure Development Cess by the government also came under discussion but the government made a questionable claim that the recoveries were hampered by the stay order granted by the courts.
Pakistan's Minister for Power Sardar Awais Laghari, Minister of State for State for Finance Ali Pervaiz Malik, the secretaries of Finance, Power, and Petroleum and the chairman of the FBR attended the first day meetings.
Led by Washington-based mission chief Nathan Porter, the IMF team arrived for a week to scrutinise the implementation of the three-year bailout package soon after its approval by the board.
The sources said that the IMF raised the issue of reducing electricity demand due to an increasing trend of installing roof-top solar panels as an alternative to highly expensive electricity.
The IMF also asked about the impact of the Punjab government's policy to incentivise solar use, which is contrary to the federal government's policies.
However, the IMF did not get a satisfactory reply to its questions on solar use and it urged the energy ministry to take the lead on the matter.
At the time of programme talks in May last year, Pakistan had briefed the IMF that it would soon end the net metering policy for rooftop solar panels and replace it with gross metering aimed at selling highly expensive and unaffordable grid electricity to consumers.
Pakistan's middle-class to rich people are quickly converting to solar-based in-house power generation after the cost of electricity has become unaffordable due to highly expensive seller-favoured power purchase agreements, inefficiency of the power system, and uncontrolled theft and leakages.
The electricity prices have more than doubled in the past two years and the residential consumers are forced to pay up to Rs70 per unit cost. The people are shifting to solar panels, which has resulted in a reduction in the electricity demand.
Power generation in September was reported to be 10% below projections. The demand also dropped by 8% during the first quarter of this fiscal year.
PM winter package
The IMF also inquired about the impact of the prime minister's winter electricity package on the overall electricity demand. But there were no firm answers, said the sources.
Prime Minister Shehbaz Sharif last week announced cheaper electricity rates for residential, commercial and industrial consumers on incremental usage for the December to February period to boost the declining power consumption.
At present, base rates for domestic consumers range from Rs37.49 to Rs52.07 per unit. Under the new package, additional consumption will be charged at Rs26.07 per unit, providing savings of 30-50% compared to existing rates.
The IMF appeared satisfied with the implementation of the circular debt management plan during the first quarter of this fiscal year.
The government met the target of reducing the flow of the circular debt within an agreed limit and its recoveries of the bills improved to about 91%.
However, the increase in recoveries was mainly because of an increase in electricity tariffs and delayed materialisation of the fourth quarterly tariff adjustments.
The IMF once again emphasised that the government should give targeted electricity subsidies to only the Benazir Income Support Programme (BISP) beneficiaries. However, the Power Division was of the view that there were legal challenges in implementation as in most of the cases the electricity meters were not in the names of the occupants.
Surplus imported gas
The issue of about 1000mmcfd surplus imported gas and Pakistan's commitment to disconnect the gas connection to the in-house power generation plans of the industries also came up for discussions on Monday, said the sources.
Under a condition by the IMF, Pakistan is required to disconnect the gas for the in-house power generation plants of the industries by January 2025. There is a strong resentment within the industry about its adverse impact on the cost of doing business.
Pakistan proposed that the industries may be allowed to run on the imported gas at a full-cost recovery basis. Currently, the government charges about Rs2,950 per MMBtu for the use of imported gas in the captive power plants, which is about Rs700 less than the market price.
The solution of charging full prices seems practical and also an answer to surplus imported gas.
The IMF asked about Pakistan's plans for dealing with the 1000mmcfd imported surplus gas due to low demand in the power sector. The Pakistani authorities wanted to provide some volumes of this gas to the industries at the full price.
It is also in discussions with Qatar for deferring scheduled LNG cargoes for 2025 and 2026 for two years due to decreased gas consumption. Under two government-to-government agreements, Pakistan can defer up to five cargoes, but the remaining 13 extra shipments lack a similar deferral option.
GIDC
The government briefed the IMF about the circular debt situation in the gas sector. During the briefing, the issue of pending over Rs400 billion GIDC dues came up for discussion. The government claimed before the IMF that there was a legal issue in recovering these dues due to court stay orders.
However, the Supreme Court of Pakistan in 2020 had dismissed all petitions filed against the GIDC levy and ruled in favour of the federal government to collect all the outstanding dues.
The apex court held that from the date of its judgment, the federal government had been restrained from charging the cess until the remaining amount was collected.
The court further held that in the remaining period of the financial year 2020-21, the Oil and Gas Regulatory Authority (Ogra) would not take into consideration the element of cess under the GIDC Act while fixing the sale price of CNG.
Due to its own weaknesses, the federal government is not collecting the dues from fertilizer and textile companies, as there is no legal bar. The high courts have also asked to reconcile the outstanding dues. In the last fiscal year, only Rs2.9 billion were recovered against the over Rs400 billion outstanding dues.
According to Topline Securities assessment of 2020, the largest cash-out flow would be witnessed from fertiliser companies to the tune of Rs110 billion. Fauji Fertiliser (FFC) will be required to pay Rs63 billion followed by Fauji Fertilizer Bin Qasim at Rs22 billion, according to the Topline.
In 2022, the PDM government had decided to expedite court proceedings to recover the GIDC from defaulters, mainly from the fertiliser sector. But nothing moved.