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First promise to the IMF broken

Two months into the IMF programme and the first promise to the IMF goes for a walk. This has largely gone unnoticed in t

Updated Sep 03 2019

Two months into the IMF programme and the first promise to the IMF goes for a walk. This has largely gone unnoticed in the local press, as Pakistan did not keep up with its promise of automatically adjusting quarterly electricity tariffs, by end August 2019. Already facing severe backlash on recent upward tariff adjustments, it does not come as a surprise.

Whether or not, the quarterly adjustments will find the light of the day, will be known sooner than later. That is because the August automatic tariff adjustment was not part of structural benchmarks, and the previous one was a prior action. But a structural benchmark is less than a month away, as the government has to notify the FY20 electricity tariff by September end, as determined by Nepra.

The Letter of Intent to the IMF had clearly stated the government’s intent to automate the quarterly tariff adjustments, which clearly has not been the case. Automation, it appears, will have to wait, before the next structural benchmark becomes due, that of amendments to the Nepra Act by December end to ensure full automaticity of the quarterly tariff adjustments and eliminating the gap between regular annual tariff determination by the regulator and notification by the government.

Recall that the previous adjustments made to the tariffs pertained to 1HFY18, which resulted in an average increase of Rs1.5 per unit for 15 months, to collect an additional Rs189 billion. The impact was originally decided to insulate domestic consumers using up to 300 units, constituting 78 percent of total domestic consumption. But as things turn out, the relaxation has been extended to consumption up to 700 units, which is bizarre. This means only 10 percent of domestic consumption is subject to the quarterly tariff adjustments.

The fate of industrial, particularly export-oriented and agriculture users is not very clear either. The budgeted subsidy in FY20 will surely fall short and give rise to more unfunded subsidy, contrary to the government’s claim of having brought the circular debt to manageable levels. The failure to automatically adjust tariffs for 2HFY18, would result in delayed collection to the tune of almost Rs200 billion, which is surely going to cause trouble.

Another point to ponder for the government is the ability to pass on the cost, so close to the last adjustment. Even if the 2HFY18 fails to happen in time or in a highly unlikely event, at all, the yearly adjustment for FY20 would likely be on the higher side, given the steep currency depreciation, which has inflated the capacity payment charges.

Keeping bulk of electricity consumers exempt from price increase may no more be an option after the upcoming tariff revision. There is absolutely no fiscal space to make way for more subsidy, when, even the current scheme of things carries the risk of a much higher subsidy bill than budgeted. Surely, the IMF is keeping an eye or to at the developments, and won’t be too chuffed at the first promise broken, for, what appeared the focal point of all structural reforms.

Copyright Business Recorder, 2019