Freezing power tariffs to save power

The official verdict is yet to come out but news reports emerging from different media sections suggest that the dangerous precedent of reversing the petrol price hike set earlier has started following the feared path. There are reports suggesting that the government might freeze the electricity tariffs for five months in clear defiance of the agreement with the IMF.
If the reports hold water, it signals a troublesome time for economic managers in the remaining half of FY11. It was less than a month back when the Finance Minister in his Letter of Intent (LoI) to the IMF sought the nine-month extension in the SBA programme.
The LoI stated that "We have also made progress in devising a plan to ensure financial viability of the electricity sector..." along other measures to keep the budget deficit within 4.7 percent of GDP.
It was back in May 2010, when the government of Pakistan agreed to continue the power sector reform programme throughout FY11, a major part of which was related to increasing electricity tariffs to recover the unrecovered power purchase costs in a phased manner. The programme that began in April 2010 was supposed to continue for a period of 15 months - and April till December clearly doesn make 15 months by any count.
What differentiates the petrol price reversal with the planned freeze of electricity tariffs is the fact that petrol prices do not fall under the umbrella of IMF reform agenda or the LoI submitted by the government. But the electricity tariffs are a vital part of the IMF agenda, and to expect any leniency from the donor in this regard would be equal to living in a fools paradise.
The government officials have reportedly tried to play down the repercussions of such a move by claiming that the differential would be covered through optimal recovery of bills and by introducing efficiency measures. The idea sounds noble, but there is no clear plan to recover from the non-paying customers, the biggest of whom is the government itself.
It would be unrealistic to assume that the government would pay its overdue electricity bills in such times of fiscal crunch when it relies heavily on bank borrowing. The chances of cost differential to rise to unimaginably high levels remain strong as the move is expected to cost the government Rs15-20 billion every month if the tariffs are not increased - the Rs5 billion-impact on government pockets as a result of petrol price reversal looks minimal in front of this, but even this could rise to higher levels if the practice continues in the months to follow.
It is sad that political motives have to overshadow the economic ones whenever the government finds itself in trouble. It appears that the stalwarts in Islamabad are not ready to face more opposition on the inflation front as they have just narrowly managed to keep the ship afloat after the recent petrol politics episode.
The consequences of this decision could be much more dangerous than what many believe, as it would not only increase the fiscal deficit, delay the IMF tranches, increase the circular debt but will also mount problems to sky-high levels just as happened in the dying days of the Shaukat Aziz government. The end of Gilanis regime might or might not be near, but whosoever gets the next chance will surely inherit a messy situation.