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Of prior actions leading to the IMF programme, energy sector leads the way. The IMF country report on Pakistan and Pakistan’s own Letter of Intent (LoI) to the IMF confirms that power is going to be pricier in the near term. The IMF has historically stressed on pricing to combat the energy mess – and it is not any different this time around, with the immediate actions revolving around increasing prices, and clearing the stockpile. The more chronic structural issues have been yet again left in the grey – granting the government time to come up with plans to reform the sector, reduce the losses and so forth.

The IMF has been informed of the prior action that the government intends to collect an additional Rs150 billion in revenues in lieu of quarterly adjustments from 3Q and 4QFY19, spread over a year. Recall that Nepra had decided on the adjustments last month, asking the government to collect an additional Rs189 billion over 15 months. This essentially means an addition of Rs1.5 per unit across the board in the final tariff.

Now the bulk of domestic consumption totaling 39 billion units out of 103 billion are exempted from the increase. So are most of the 7 billion units used for commercial consumption. With 46 billion units out of the ambit – the price increase would have to be nearly double the rate, i.e. around Rs3/unit, and not a 10 percent hike as repeatedly mentioned in the IMF document.

The document also says that Rs35 billion have been earmarked in the budget for the implicit subsidies offered to the industrial and export oriented sectors. Back of the envelope calculations suggest that the amount of subsidy in lieu of the industrial support package would be in excess of Rs60 billion, at over Rs2.4 per unit. And that too is based on FY19 tariffs, suggesting that it may well be higher than that.

What is known for sure is that the second round of quarterly adjustments will be made before the end of August 2019. Recall that the unfunded subsidy and collection resulted in an impact of Rs189 billion in 1HFY19. Nothing suggests that the adjustments in the 2HFY19 would be any lower. If anything, the adjustments would be north of Rs189 billion – as the massive subsidies to export and general industries were granted effective January 1, 2019. And that was not part of the budgeted subsidies – and is now a part of the accumulated stock of circulator debt.

In essence, expect another Rs2 per unit to be added to the tariffs, soon after the recent adjustment of Rs1.5/unit (which in reality would be much higher given the exemption to bulk of domestic consumption). So that is almost 30 percent plain increase in power tariffs over yesteryear. And we have not even talked about the FY20 tariffs, which would have to be notified by September 2019, as part of structural benchmark. With the power mix in mind, which is tilted towards imported fuel, the depreciating rupee, and high capacity payments as new plants are fully operational - the FY20 tariff could well be very tough.

Surely, Rs162 billion as allocated subsidy would not cut the deal. At best, the government would be able to offer relief to dome domestic consumers and the bar may have to be lowered from 300 units to 200 units, come September 2019. And even after all that, nothing is to say the circular debt will have gone out of the equation completely. The energy measures do tell why the IMF’s projections of average 13 percent headline inflation for FY20 do make sense. Tough times ahead for power users.