Commitment to IMF: cost of servicing SFCs to be passed on to power consumers
In a Letter of Intent (LoI) submitted by the government to the IMF Board as a prerequisite for the release of the $555.6 million tranche the government has committed to passing on the cost of servicing of Syndicated Finance Certificates (SFCs) (which, sources claim, are about Rs 300 billion) to the electricity consumers as eligible capital expenditure.
Copyright Business Recorder, 2014
IMF's staff report on second review under the extended arrangement released on Friday, maintains that the authorities are on track to deliver the agreed 3/4 percent of GDP annualised reduction in subsidies and continue to be within the medium-term target for a subsidy rationalisation.
As agreed to reduce accumulation of new energy sector losses, the authorities reflected the costs of servicing the syndicated term credit finance facility in the notified base tariff for FY 2013/14, the IMF second review under the Extended Fund Facility maintains. However, the regulatory authority NEPRA declined the proposal and did not include the facility in the tariff determination for FY2013/14. As a result, servicing these facilities continues to add to circular debt, although it does not affect the budgeted subsidy cost.
To address this, the government is planning to incorporate this in the review petition as an eligible capital expenditure. The policy entails periodic increases in the average tariff, aimed at eliminating the tariff differential subsidy for all consumers except the most vulnerable over the next three years. The first adjustments to commercial, industrial, bulk, and large consumers led to reduced subsidies of about 3/4 percent of GDP on an annualised basis. In the context of FY 2014/15 budget "we will further rationalise subsidies by roughly 0.4 percent of GDP. We will undertake additional action in the FY 2015/16 budget to reach a maximum of 0.3 percent of GDP thereafter. We are preparing the third round identified in the three-year subsidy rationalisation plan for phasing out the Tariff Differential Subsidy (TDS) to continue to bring tariffs to cost recovery level. We will finalise the details for this round by end-April 2014 based on the FY 2013/14 tariff notification," the Finance Minister and Acting Governor SBP committed to the Fund, as required.
The Finance Minister claimed that the government has hired a professional audit firm to conduct technical and financial audits of the system to identify the stock and flow of payables at all levels of the energy sector (including Power Sector Holding Company Limited). The audit will be completed by end-April 2014. Based on the findings of the audit, the government will design a roadmap to prevent the accumulation and recurrence of payables arrears including the payables due from the servicing of term credit finance facility.