IMF rejection of CD, tariff strategy: MoF’s ‘half-hearted’ support cited as the reason

ISLAMABAD: The Finance Ministry’s half-hearted support may have been a reason behind the IMF rejection of the circular debt and tariff rationalizations strategy that was proposed by the Ministry of Energy (Power Division and Petroleum Division), sources close to the Ministry of Energy told Business Recorder.

The strategy with requisite projections, sources said, had already been cleared by the Special Investment Facilitation Council (SIFC), however, the calculations did not convince the IMF team that it was workable and the team conveyed in a two-page memo that “it does not agree with the logics given by the Power Division.”

“The IMF has raised several points on the proposed tariff rationalization plan including the amount of subsidy, its impact on domestic consumer’s tariff, the impact of alteration of cross-subsidy, the industrial tariff on industry growth, exports growth, etc,” the sources said, adding that the Ministry of Energy believes that the issues pointed out by the Fund are really not a component of the proposed plans.

“We were not expecting questions from the Fund after direct talks and sharing of requisite data,” said an official on condition of anonymity.

A team of experts from the Ministry of Energy (MoE), ie, the Power Division and Petroleum Division, has prepared a response to the Fund’s Memo and sent it to the IMF through Finance Ministry which is facilitating communications.

“We will engage more to clarify our plans,” the sources maintained.

According to IMF Mission Chief Nathan Porter “restoring the viability of the energy sector is critical to Pakistan’s economic recovery and fiscal sustainability,” adding that it is essential for the government to focus on broad-based reforms, including reducing the high cost of energy, improve compliance and reduce theft and line losses, end captive power, and fix the governance and management of the Discos, as well as keep up with regular tariff adjustments.

Porter added that “the proposed plan does not address the underlying problems. In particular, the circular debt neutrality of the tariff rationalization plan is doubtful and it would place a significant additional burden on vulnerable households…the circular debt ‘reduction plan’ entails fiscal risks given the chain of transactions involved and would also continue the use of supplementary grants which have placed a considerable burden on the fiscal accounts in recent years.”

The lead player in the development of the strategy is Mohammad Ali, the caretaker Energy Minister, who is unlikely to continue in this position once the new government is installed.