EDITORIAL: The Oil and Gas Regulatory Authority (Ogra) has raised gas prices for both Sui companies - Southern and Northern – from between 9 to 35 percent to meet the International Monetary Fund (IMF) condition under the ongoing Stand-By Arrangement (SBA). Significantly, the IMF staff appraisal acknowledged that natural gas tariffs were raised sharply on 8 November 2023 partly because no tariff adjustments had been made between September 2020 and January 2023 (and while in 2020 the country was grappling with the pandemic yet subsequently politics accounted for failure to raise gas tariffs).
In the Memorandum of Economic and Financial Policies (MEFP) uploaded on the Fund’s website last month, two highly disturbing facts were noted — the gas sector’s circular debt increased to an estimated Rs 2.084 trillion (2.5 percent of GDP) at end-FY23, from PRs 1.623 trillion (2.4 percent of GDP) at end-FY22, quickly approaching that of the power sector; and liquidity constraints exacerbated gas shortages. The main driver of this phenomenal increase, as acknowledged by the caretakers negotiating on behalf of the people of Pakistan, was the “non-implementation of regular end-user gas price adjustments in line with semiannual Ogra determinations of prescribed prices since September 2020. Additional drivers were the accumulation of the re-gasified liquid natural gas (RLNG) tariff differential since FY19, and diversion costs (that mainly reflect the diversion of costly RLNG to domestic consumers during the winter months)”.
And, the pledges made by the caretakers to the Fund during the first review negotiations declared a success on 15 November 2023 with respect to the gas sector were five-fold: (i) continue with regular end-user price updates, anticipated for December 2023, in line with revenue and legal requirements; within the mandated 40-day window; (ii) reduce incentives for captive power.
The pricing structure for non-domestic consumers will continue to be refined via semiannual notifications, including for the December 2023 determination, with the goal of directing scarce resources to more efficient assets, phasing out captive power in the near term, and transitioning captive power users to the electricity grid, in line with the Cabinet Committee on Energy’s decision of January 2021; (iii) Move to reduce price disparities between regions and industries, and within industries to include moving toward prices provided to the fertilizer sector that are closer to cost-recovery (gas subsidy to a section of the fertilizer sector receiving a large cross-subsidy from industry to end by March 2024; and equalising rates between export and 7 Ogra notified adjusted end-user gas prices of on average 75 percent on February 17, 2023, to generate an estimated revenue of PRs 310 billion from consumers; (iv) unify price across indigenous and imported RLNG; (v) improving the monitoring and management of gas circular debt.
There is no doubt that the gas sector is increasingly faced with several issues that range from a constitutional provision that allows the province where the gas field is located (Sindh and Balochistan), a priority in terms of supply coupled with the widening disparity between the cost of indigenous and imported RLNG. However, given the rise in gas sector’s circular debt, it is baffling as to why Ogra decided to raise the threshold of losses (unaccounted for gas) in transmission (7.78 percent) and distribution (10 percent) networks from what was previously allowed as well as an increase in non-operational expenses, including a 73 percent rise in sports-related expenditures.
Apparently, this recent rise in gas prices was not factored in the Consumer Price Index for January, which indicated a month-on-month decline of 1.4 percentage points even though its effectivity will date from 1 January 2024. In addition, the power regulator, Nepra, has approved a rate hike of 4.57 rupees per unit effective this month, which will raise the CPI. However, in the event that the weather becomes milder upcountry as February ends, one may assume that demand for gas/electricity would wane and therefore a householder’s bill may not be as high, thereby reducing some pressure on the government. Yet, it has to be borne in mind that the rates today are untenable for an average income earner already engaged in tough choices with food prioritised over health and education needs — a situation that necessitates an in-house plan, targeting, among other things, inefficiencies, corruption and the continuing elite capture of resources by increasing leverage with the Fund and not by ongoing practice of passing on the buck to consumers or by raising indirect taxes that fall heavily on the poor instead of slashing the government’s current expenditure that would reduce the need to borrow. Hence the need for sectoral reforms without any further loss of time.
Copyright Business Recorder, 2024