Prime Minister Shahbaz Sharif commended the government’s economic team for its tireless efforts to not only secure the 1.3 billion dollar 28-month new arrangement under the Resilience and Sustainability Facility (RSF), but for successfully reaching the Staff-Level Agreement (SLA) on the First Review for the 37-month Extended Arrangement under the Extended Fund Facility (EFF) during a previously scheduled cabinet meeting.
The cabinet meeting took place on 26 March and coincided with the issuing of a press release by the IMF on its website dated 25 March 2025, early 26 March in Pakistan.
Shahbaz Sharif then proceeded to extol the “collective sacrifice of the nation” while dismissing earlier claims by the opposition that a mini-budget would be required to reach the SLA.
However, what is disturbing is that collective sacrifice has largely been exacted from the lower to middle income groups due to three prevailing elements.
First, the heavy reliance of the country’s tax system on indirect taxes whose incidence on the poor is greater than on the rich, continues. It is estimated at nearly 85 percent of all tax revenue – 60 percent from indirect taxes as per the budget documents and 75 to 80 percent of direct taxes are sourced to withholding taxes levied in the sales tax mode, an indirect tax – a practice that persists to this day in spite of a recommendation by the Auditor General of Pakistan to the Federal Board of Revenue to desist from it.
Second, rising reliance on petroleum levy as a revenue source, an indirect tax placed under other taxes (a rather obvious attempt not to share the proceeds with provinces). This is also largely paid for by the lower to middle income earners.
And finally, the appalling energy sector’s performance is passed onto the consumers with the objective of achieving full cost recovery, a standard donor condition, rather than improving governance.
This Thursday past Prime Minister Shahbaz Sharif amidst much fanfare announced a reduction in electricity rates by Rs 7.41 per unit for domestic and 7.69 for industrial consumers.
This he clarified was possible through successfully renegotiating contracts with IPPs though those with foreign ownership have expressed their concern at what they claimed were coercive tactics, an exercise that began in 2020. Be that as it may, rescheduling (as opposed to renegotiating) by IPPs set up under the China Pakistan Economic Corridor (CPEC) umbrella remains stalled.
In addition, the international petroleum price decline was not passed on to the consumers on 16 March with the pledge that the government will divert additional revenue towards reducing electricity rates.
While the exact amount of savings for the past fifteen days was not shared by the Prime Minister yet as the price of petroleum depends on external factors (minus the petroleum levy and sales taxes) it is unclear how long these savings can be relied on; in addition, there is a need to determine whether a lower to middle income earner’s kitchen budget allocates more to transport (petrol) than electricity.
What should be a source of concern to the government is the possibility of the Fund’s refusal to extend a waiver in the second review for the revenue shortfall (from what was targeted) which was 703 billion rupees July-March 2025.
The Prime Minister claimed that convincing the Fund to approve the tariff reduction was a Herculean task, and the question is why did the Fund oppose it.
Three possible factors may have been considered: (i) the reduction is across the board, and given the poverty levels in this country today (nearly 40 percent as per the World Bank two years ago and rising since then as per independent economists) the savings should have been targeted through Benazir Income Support Programme; (ii) the savings from renegotiating the contracts, estimated at 3696 billion rupees over fifteen years, is a projection that is not budgeted and therefore cannot be diverted to reducing tariffs; besides it is unclear whether the renegotiating of contracts under CPEC are included in this forecast; and (iii) international petroleum prices are outside the purview of the government.
Notwithstanding the decline in tariffs, structural adjustments are critical to ensure that these gains are not short-lived. There is a need for a massive improvement in governance (reducing distribution and transmission losses), formulating an energy policy that takes account of all existing lacunas in the system, inclusive of ending nearly half a trillion rupee annual subsidies to equalize tariffs, as well as desisting from enhancing generation even if it is from renewables as that reduces demand from the existing grid and will raise the capacity payments to IPPs who have not yet agreed to renegotiate/reschedule.
And finally, this obsession with privatization being the solution to all ills needs to be looked at in the context of the privatized K-Electric, which is the recipient of an annual subsidy of over 170 billion rupees as tariff equalization subsidy as well as its reliance on supply from the national grid to this day.
Those not included in Shahbaz Sharif’s definition of collective sacrifice are: (i) the parliamentarians who passed a bill titled members of parliament (salaries and allowances) amendment bill 2025 giving themselves a 200 percent pay raise and the cabinet members (more than doubled in March to 55) to receive 188 percent raise; (ii) recipients of salaries at the taxpayers’ expense who were awarded a 20 to 25 percent increase in salaries in the current year’s budget; and (iii) pensioners who account for 1.04 trillion rupees this year funded entirely at the taxpayers’ expense.
Notwithstanding the need for the Fund programmes at the present moment in time (when even friendly countries are unwilling to extend assistance including rollovers without Pakistan being on a rigidly monitored Fund programme) the Prime Minister’s praise for his team members is a tad unwarranted. This is because accepting all IMF conditions without demur hardly merits a pat on the back.
The current team leaders have, like their predecessors, failed to present alternate in-house recommendations – for example raising the country’s leverage through a curtailment of current expenditure, instead of increasing it by 21 percent this year, supporting growth oriented policies which require an easing of the severely contractionary monetary and fiscal policies in force today and by initiating structural reforms in the energy and tax systems – measures that would set the stage for achieving the stated goal of weaning the country out of its heavy dependence on foreign assistance.
To conclude, reducing electricity tariffs is an achievement, though the reduction is not enough to allow industry to compete with its competitors abroad Copyright Business Recorder, 2025
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