The budget document will be here in a few days. With how things have been shaping up so far, it is uncertain as to what happens with the power sector. Granted, social safety spending will be encouraged, as also hinted by the IMF at various stages, but will that also extend to a largely untargeted power sector subsidy, remains to be seen.
Recall that power sector subsidies account for inter-disco tariff differential, which was estimated and budgeted at around Rs200 billion for FY20. No marks for guessing, the actual spending on power subsidy is likely to be significantly higher than Rs200 billion for FY20 – as the fiscal year saw various rounds of price relief offered for one customer category to another.
And then came Coronavirus. The government has offered various versions of relief for customer categories – ranging on income class and usage. Bulk of domestic consumers up to 78 percent of all domestic consumers, have ben offered deferments in electricity bills, in addition to a sizeable relief. The government has earmarked sufficient amount in the Covid stimulus package for power sector bills – and this should not become a drag on the subsidy payments. The power sector subsidy likely overrun is mostly related to delays in power tariff adjustments, both monthly and quarterly.
The amount accumulated in lieu of delayed quarterly tariff adjustments in FY20 so far is a little over Rs160 billion (see: Power “unadjusted” adjustments nearing Rs200 billion, published Jun 2, 2020). It would be outlandish to believe, if not out of question, that the government is mulling over any sort of power tariff revision at the start of FY21.
The circular debt accumulation which was supposed to be zero by the end of FY20, is as menacing as it has been ever before. The stock has reportedly touched Rs2 trillion. Any effort to blame it on the pandemic would not work, as the government has been toying with automatic adjustments ways before the virus hit Pakistan.
The energy tariff freeze came when Pakistan was battling with decade high inflation, and all the IMF considerations were brushed aside, which led to deferment of the second performance review. How long can Pakistan continue with the tariff freeze will depend more on how long Pakistan wants to, unlike the common perception of when the IMF demands Pakistan to stop.
At the least, the government can start with small steps and bring back the monthly adjustments in picture. Now that the fuel prices are favourable, and the merit order has some FO plants high up in the order – it would not hurt to spread the previously unadjusted higher FPA with the current fuel prices. The quarterly adjustments would still take some time. Meanwhile, if some effort is put into reducing the T&D losses to some extent and start the privatization process for a few discos – things may start falling back in place. Without it, the cycle will go on forever. Pakistan’s capacity to fund the power inefficiencies through untargeted subsidies is limited – and so is the IMF’s tolerance for non-rationalization of energy tariffs.
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