Gas, power tariffs: government to revisit cross-subsidization arrangements

The government plans to revisit the current cross-subsidization arrangements and notify higher tariffs in the gas sector to ensure adequate cost recovery as well as notify revised electricity tariffs. This was revealed in the IMF staff level report on "first post-program monitoring discussions" with Pakistan released on Thursday.
The IMF staff recommends considering additional electricity surcharges to facilitate cost recovery until the underlying structural issues are tackled and urged Pakistani authorities to make efforts to reduce technical and distribution losses in the power and gas sectors, including by stricter enforcement of the "Gas Theft and Recovery Act", to contain arrears.
The report noted that privatization and restructuring of key loss-making PSEs have been largely on hold. Meanwhile, financial losses by the state-owned airline and steel mill have continued to accrue, while the accumulation of new payment arrears of power distribution companies (so-called "circular debt") - which was brought to near zero at end-fiscal year 2015-16-has resumed, reaching Rs 193 billion (0.5 percent of GDP) since July 2016, with an accumulated stock of such arrears of Rs 514 billion (1.5 percent of GDP) by end-December 2017. The combined accumulated losses by these PSEs now exceed Rs 1.2 trillion (4 percent of GDP), which could eventually lead to sizable demand for budgetary resources. In addition, inter-agency arrears in the gas sector, although still low, have been rising, reflecting limitations in the current cross-subsidization arrangement between the two publicly-owned gas companies and delays in updating gas tariffs.
The IMF supported the authorities'' intention to notify revised electricity tariffs, which would help contain the buildup of power sector arrears, and urged faster implementation of other components of the circular debt reduction plan (including continued efforts toward improving distribution companies'' losses and collections).