IMF assessment of power sector (i)

It is nearly the end of the present government’s tenure and the slide in political capital has been accompanied with a slide in the general state of the economy over the past year. One of the major promises that got the PML-N government elected, that of putting an end to the menace of load shedding, is still far from being fulfilled.

One of the core problems at the heart of the power sector crisis is that of circular debt. The fundamental issue has been the recovery of arrears and the failure to pass on higher tariffs to end consumer by the distribution companies (DISCOs). The recently released IMF Article-IV consultation report by the IMF has stressed upon the need to contain the accumulation of arrears which is crucial for a financially viable and growth supporting power sector.

The IMF has highlighted weaker bill collection by DISCOs as well as failure to adjust end-consumer tariffs as major reasons behind the growing circular debt. It notes that the accumulation of power sector arrears resumed in the first half of FY 2016/17 with the stock increasing to Rs374 billion (about 1.2 percent of GDP).

As this column has commented earlier, oil prices came to the government’s rescue otherwise matters would have been much worse. The IMF also noted that while most DISCOs met their December-end 2016 targets in terms of collection, about half met their targets in terms of distribution losses.

There are still an astounding number of politically sensitive areas as well as political establishments that do not pay for the electricity they consume. This column is of the view that although generation and transmission issues can be overcome relatively quickly, but distribution losses cannot be eliminated without genuine political will (Read: “Inevitable circular debt” published on 02 June, 2017).

The IMF also underscored the need for “planned IPOs of DISCOs to strengthen corporate governance and mobilize proceeds to start reducing the stock of outstanding arrears.” This is now age-old advice that has been dispensed countless times yet the problem still persists. Without the appropriate structural reforms, a financially viable and operationally sustainable will continue to remain a distant dream on the horizon.