Frozen brains - Freezing tariffs

"We have also made progress in devising a plan to ensure financial viability of the electricity sector, which will enable us to achieve the budget deficit target of 4.7 percent of GDP," read the government of Pakistans Letter of Intent (LoI) to the IMF in December 2010.
Wonder if the continuation of subsidy by freezing the electricity tariffs for the remainder of the fiscal year is a part of the mentioned plan that vows to ensure financial viability of the electricity sector.
The government has reportedly decided not to raise the electricity tariffs any further against the earlier sector reform plan agreed with the IMF. The idea is to dole out Rs15 billion a month till the end of the fiscal year, to the inefficient Pepco on account of tariff differential subsidy. This is in complete contrast to both the budgetary targets and the IMFs Stand-by Arrangement.
It should be recalled that in the budget speech of FY11, electricity subsidy was allocated Rs84 billion, of which only Rs30 billion were to be used for inter-disco tariff differential, while a large portion was marked for interest payments on TFCs.
The government, as it often happens, missed its target in FY10 too, as it ended giving Rs77 billion as subsidy on tariff differential against the budgeted Rs10 billion. It is feared, that freezing the tariffs would result not only in breaching the budgeted target, but a higher amount paid in subsidy than in FY10.
It was earlier agreed with the IMF that the government will eliminate the tariff differential, recovering the unrecovered power purchase cost for 15 months starting April 2010. Now that the government is set to violate the commitment, the IMF will be in no hurry to release the next tranche to Pakistan.
The full-year fiscal deficit, which is seen tip-toeing to 8-8.5 percent, could go even worse with the continuation of such subsidies in such miserable times. Attaining a 4.7 percent fiscal deficit can only be a fools dream at this point.
The decision of freezing the tariffs itself, regardless of the IMF commitments, deserves a tough screening as it negates common economic sense. The freezing of power tariffs, undoubtedly, has more to do with political pressure as the government is just managing to stay afloat in troubled times. But, the inter-disco tariff differential, as the name itself suggests, is not the noblest of ideas.
It is a fact that performance of discos across the country varies from efficient to appalling. Naturally, they deserve different tariffs and the consumer of one good disco should not be paying for an inefficient one whose consumers do not pay, or which has T&D losses issues of its own or an inefficient billing collection system.
The consequences of these decisions are going to haunt not only the electricity sector, but also the overall economy for long, as it will add to the fiscal deficit, delay the IMF tranche, increase circular debt and send the sector back into the mess in which it was during the dying days of Shaukat Aziz.