‘Cost-side reforms’: IMF says Pakistan needs to revisit terms of power purchase agreements

The International Monetary Fund (IMF) has urged “strong cost-side reforms” for restoring the viability of Pakistan’s energy sector, highlighting also the need to revisit, where feasible, terms of power purchase agreements as part of the agenda.

In its staff report for the second and final review under the recently-concluded $3-billion Stand-By Arrangement, the IMF also said Pakistan should be able to meet its fiscal year 2023-24 circular debt management plan (CDMP) target of Rs2.3 trillion with zero net zero stock accumulation.

“Timely notification of the FY25 annual rebasing will be critical to the continued prevention of further circular debt flow, as will further collections efforts, including steps to enhance and institutionalise digital monitoring,” the IMF said in the report released on Friday.

“In parallel, the authorities should press ahead with agricultural tube well subsidy reform, for which a finalised plan is targeted by end-FY24.”

However, the IMF added, that restoring energy sector viability requires strong cost-side reforms.

This includes:

• continuation of efforts to improve transmission infrastructure, including for better integration and expansion of renewable energy capacity;

• improving DISCO performance via either privatization or long-term management concessions;

• moving captive power demand to the grid;

• revisiting, where feasible, the terms of power purchase agreements; and

• continuing to convert publicly-guaranteed PHPL debt into cheaper public debt“.

The staff report is a crucial 65-page document as it broadly outlines the reforms’ agenda that has either been undertaken by Pakistan or where Islamabad needs to put more efforts.

In the case of the energy sector, terms of power purchase agreements have not come heavily under the scanner as the focus has first been on taking recovery and tariffs to a sustainable level.

Higher energy prices triggered mass protests across Pakistan last year and have also stifled energy demand with policymakers scratching their heads on how to move forward for the sector’s viability.

Pakistan pursued an aggressive policy to add power capacity, but years of slow economic growth, power theft, and under-investment in transmission and distribution networks have meant that bill recovery has not been at par.

With runaway inflation triggering record high interest rates, demand for energy has reduced further, leaving Islamabad in a ‘catch-22’ situation.

In its staff report, the IMF also admitted that the only sustainable solution for the sector is decisive action to address cost-side and infrastructure issues.

The IMF’s staff report is also an important document as many see it as a guideline in the light of Pakistan’s pursuit for a longer, larger programme with the IMF.

A mission of the lender is expected to visit this month ahead of the budget-making exercise where new taxation measures targeting non-filers and retailers are currently being pursued.

In the letter of intent, part of the IMF staff report, Pakistan also agreed that it will focus on “mobilising significant additional revenue” especially in undertaxed sectors.