Increase in power tariffs is as inevitable as Pakistan going back to the IMF. It is only a matter of when, and not if. Recall that NEPRA had recommended an increase of Rs3.82 or nearly 32 percent in the average power tariff across consumer categories. The government is yet again found reluctant on how to approach the recommendation, given its dire political consequences. But now with the by-elections out of the way, and the IMF programme around the corner, the government has nothing to lose, as now is the best time to bite the bitter pill.
This is surely not the first time power tariffs will be raised. Last such instance was when the PML-N came in power back in 2013, and jacked up electricity tariffs by as high as 52 percent with a minimum increase of 19 percent. That was, months after injecting Rs480 billion in the name of clearing the circular debt and weeks after entering the IMF programme.
Things ran smooth for two years, as the cushion of almost zero circular debt was there, which started accumulating only from year three. The current government has not hinted on any sort of fresh cash injection in the system to clear the circular debt. The electricity price increase could be announced either side of the IMF programme – prior acting being the likelier option.
The PPP government which handed over the reins to the PML-N in 2013 carried the tariff increase exercise thrice during the five year tenure and rightly so – as it largely acted on the regulator’s recommendation. In some cases, the increase in domestic consumer category was as high as 99 percent for the highest usage slab, over the period. That required some guts or an IMF programme. The IMF programme was surely there. And some guts too.
In came the PML-N and the hike in October 2013. The fact that this remained the only price increase in the five years, partly explains the circular debt stock. The government had it easy for two years because of a relatively cleaner financial chain of the energy sector. It became increasingly difficult to take any action later on, as the government found itself engulfed in one controversy or the other – on the roads or in the courts. The IMF was still a constant, but the political compulsions weighed way more. What resulted was a near hiatus for five years.
Here we are today. The IMF programme is almost a certainty. The power sector miss is another one. The government would try and come out of it, attempting not to bother the masses a great deal, but that is going to be an uphill task. The fiscal side is limited, and the option of overrunning subsidies does not seem probable.
Will it cause inflation? Almost certainly. Can it be avoided? Certainly not. That said, the historical trends suggest that all power price hikes are not necessarily followed by higher inflation. Two of the previous four instances of power tariff hikes have resulted in increased inflation in the following year – while other two have witnessed a decrease. But with a relatively low base of inflation this time around, higher CPI is well on cards.
The government would do well to not repeat the mistakes of yesteryears, after announcing the tariff hike. The structural issues that contributed heavily towards such tariff must be tackled. The benefit of an improving fuel mix for power generation must reach the end consumers, sooner than later. And that will only happen, if the governance models at the generation, distribution, and transmission levels are dealt with. Without it, we will be looking at another round of tariff increase, possibly around another IMF programme, and probably by another government.
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