“There will be no unfunded subsidy in the coming budget,” said Nadeem Babar, Chairperson Energy Reforms Task Force, in an interview with BR Research published yesterday. Going by his words, either the total power subsidy will have to go significantly higher, or the power tariffs for domestic sector will have to be considerably increased.
The budgeted inter disco tariff differential subsidy for FY19 is Rs134 billion. The power tariffs notified in January 2019 had them well covered with the total subsidy across categories amounting to Rs147 billion. But then came the industrial support program with special focus on zero-rated export sector, and the unfunded subsidy, only on account of revision on industrial tariff has shot to Rs110 billion for the full year, taking the total subsidy for the year to Rs257 billion (see: Power tariffs: Who will foot the bill’ published Jan 10, 2019).
Recall that Nepra had proposed the power tariffs to be increased by Rs3.8/unit, but after much deliberation, it was decided to be done in three phases, of which Rs1.2/unit were increased in January 2019. The unfunded subsidy is a big contributor to the ever increasing circular debt, also singled out by the Chairperson Energy Tasks Force. Given the fiscal constraints, it seems highly unlikely that the government will find a way to fund Rs55 billion (by Jun 2019) on account of unfunded power subsidy arising solely from industrial tariff revision.
Power tariffs are slated to go higher, and that could be sooner than later, given the IMF programme seems just around the corner. The IMF is not really fond of power subsidies – funded or otherwise. If the government intends to continue with the industrial subsidy, all chances it does, given the focus on export revival for the economy’s revival, the tariffs for domestic sector will have to be increased significantly.
Around two-third of domestic sector consumer faced no increase in the tariffs in the last revision. Should the government decide to shift the burden of inter disco tariff differential from industrial to domestic – it could serve the purpose of maintaining subsidy at current levels, without hurting the industrial subsidy. But it is easier said than done, as the subsidy to domestic consumers up to 300 units amounts to Rs199 billion.
Even if the domestic subsidy is slashed by a half – a compromise will have to be made on account of industrial subsidy, or the total budgeted subsidy will go up by the same amount. Both of these appear unlikely, and the likeliest scenario would be unfunded subsidy continuing. And that simply means more inefficiency, and a faster increase in circular debt pile. And the price increase of Rs1.2/unit each in two phases, only relates to the prior year adjustments that the previous governments failed to pass on. The impact of fresh revisions and petitions is not even being considered in this scenario analysis.
So while the government may well be eying “circular debt to be Rs50-60 billion by July 2020,” the likelihood of that appears slim. Tariffs are a vital part of the power sector reforms, but it must not become the sole and soul of reforms, especially when under the IMF programme. Better management, lower losses, can also result in savings closer to the amount of unfunded subsidy. That area demands equal, if not, more focus.
Comments
Comments are closed.