Power sector: Reforming with subsidies

You have long been told the energy subsidy reforms are in full swing. There are talks of limiting energy sector subsidies to the neediest and phasing them out. And then you have a budget that lays out the highest-ever subsidy for the power sector at a colossal Rs1.19 trillion. The revised estimate for the ongoing fiscal year is Rs584 billion – which makes the FY25 allocation double from the current year.

The finance minister, in his inaugural budget speech, talked about bringing the circular debt accumulation to zero. He cited the same old revamping of the discos board, strengthening the distribution and transmission sectors and making a move towards renewable. Fantastic ideas. Then one skims through the budget document and can’t help but notice the inter-discos tariff differential subsidies going up from Rs150 billion to Rs275 billion.

So much for the “improvement” in collection and and-theft campaigns – that you end up setting aside at least Rs2.75/unit for tariff subsidies, the electricity tariffs after base tariff revision in July 2024 are slated to go at least 10 percent higher, but the government has made more room for subsidies, most likely for the protected segment. It is surprising the IMF has agreed upon such a significant upward revision in power subsidies – especially when it has stressed the implementation of the Circular Debt Management Plan.

The AJK unrest earlier this year – has its reflection in the subsidy allocations, which have gone up four times from Rs25 billion to Rs108 billion. There are more provisions under various heads such as GPPS-Equity, FATA areas, and additional subsidy – and the total amount goes up from Rs125 billion to Rs509 billion – with no clear indication of the use and recipients of most of these amounts. This is clearly not the IMF-favored playbook unless the government has been granted one-time approval to make lump sump payments to power producers.

More clarity will arise once the base tariff revision is made, as that will provide a clearer picture of the amount of subsidy required to be extended to the unprotected. As per the government’s own reports, the circular debt cumulation has been halted since October 2023. It remains to be seen if there are plans to make cash settlements to reduce the stock – as the IMF has clearly ruled out any form of non-cash settlement. Clearly, such a colossal amount after years of “reforms” looks pretty much a step back.