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Of Rs465 billion circular debt in FY19, Rs120 billion stemmed from delayed tariff adjustments. Fresh into the IMF programme, and even leading to it (as prior actions) the government was very keen on addressing the tariff notification delays. As a result, the buildup of circular debt went significantly down in 1HFY20.

Come 2020, and things have started to look different. The IMF team is in town and has reportedly taken note of the very slow progress on energy sector, particularly on tariff fronts. The IMF though, is not the only one taking notices. The Prime Minister himself has taken quite a few in the wake of multiyear high inflation. Reports suggest that it is for the PM’s directives that periodic adjustments pertaining to electricity and gas have not come into effect.

Delaying the power tariff notifications so early into the IMF programme is a clear indication this programme would either be very lucky or will have to grant enough waivers – to be able to be completed. The IMF’s stance on power sector is well documented. The IMF’s prescription on power reforms has largely revolved around revenue measures, which has attracted its fair share of criticism. Be that as it may, Pakistan had agreed to act on the IMF’s directives – of which timely announcement of automatic tariff adjustments, was a key structural benchmark.

Had it not been for food induced inflation, at least the quarterly tariff adjustment for 2QFY20 would have been announced. It appears, the arrears will now be accumulated instead, and this may give rise to another round of unfunded power subsidy by the end of FY20. Throw in the government’s failure to make amendments to the Nepra Act and the inability to sign performance-based contracts with discos by January-end, and you know there is ample lack of will, to take more politically challenging decisions, at a time when the political capital is fast eroding.

The system could still do with another round of delay in quarterly tariff adjustments, as the bigger prior year adjustments were already made last year. But the real challenge will come in a few months, when the annual base tariff adjustments become due. Add the prior year adjustments, and that could well be in excess of 20-25 percent of the current tariff.

From what has been observed, the government does not want bulk of the domestic sector to take the brunt. Expect 60-80 percent of domestic consumption to face the least increase, if any. Secondly, the agriculture sector, which was heavily subsidized last year, would not be an easy sell, specially given the recent rounds of wheat and sugar prices, coupled with crop shortages. That leaves the industrial sector to take the bulk of the burden. Try doing that to the export-oriented sector. It would be counterproductive, when the reform is promised to be built around growth and sustainability in exports.

So what happens? Massive subsidies? Where is the fiscal space? The IMF has prescribed reducing and rationalizing the subsidies. The PM wants relief for people and industries. Something must give. And this piece has not even touched on the gas sector arrears. Say hello to the old friend that is circular debt. It is going nowhere.