Price freeze “at all cost” could be costly

“Please bring down the power price”. “Would you mind shutting the plants producing expensive power?” Expect yourself to be asked the above if you are a power producer in Pakistan. Unless the Prime Minister does not intend to follow up on what he said speaking to a public gathering earlier this week.

The slide in food prices, and lately the oil prices, seems to have instilled renewed confidence in the PM. The electricity and gas price freezes are now in the works. And if the PM’s words are to be believed, the government is in no mood to further increase the energy prices, “at any cost.” What was earlier believed to be a price freeze for the remaining few months of FY20, is sounding more and more a longer-term play.

Recall that Pakistan is still in the IMF program. The deferment of quarterly tariff adjustments and gas tariffs, at a time when inflation was touching multiyear high, was fathomable. One wonders if the same will sell beyond the second review. The IMF is not likely to show more leniency beyond FY20 on energy tariffs. Pakistan has also very recently entered an ADB program focused on power reforms, a large part of which revolves around rationalizing tariffs and automating the whole mechanism.

This is not unprecedented. Previous two governments had opted for similar routes beginning second year in the office, having significantly raised the tariffs right after entering the IMF program. The IMF had shown enough restraint last two times over successive governments’ inability to rationalize energy tariffs. The non-compliance on energy reforms did not put the previous two programs into jeopardy. Nothing suggests it will, this time around.

IMF’s possible reactions must not decide which way the energy pricing is dealt. A lot of room will have to be made for direct and focused subsidies come FY21. Should the unfunded subsidy continue, stemming the flow of circular debt will become more difficult than already is. If the PM is indeed serious in freezing the energy prices at any cost, he will have to do much more than just talking to power producers.

Oil prices will not remain low forever. Banking entirely on improved fuel mix won’t cut the deal either. Privatizing some generation and distribution won’t be a bad start. No matter how much more efficiencies are brought overnight, the nature of IPP contracts and the demand dynamics are not going to change overnight. And that simply means there will have to be significantly higher subsidy this time around. Either that, or the circular debt flow can be allowed to swell to new highs, only for the next government to worry about it. Price freeze won’t be easy.