Just when one thought the power tariff hike soap was over with a little over 60 percent increase in the last two years, signs are emerging that it might continue for at least another year.
Bear in mind that back in December 2009 the government promised to do away with the inter-disco tariff differential by August 2010, following the agreement with the IMF. The programme required electricity tariffs increase by 24 percent in a phased manner in order to eliminate the generation cost and price differential.
Although, the government gleefully managed to pass on the tariff differential to the end users by raising the tariffs, it could not meet the other requirement of limiting inter-disco tariff differential to Rs55 billion, as agreed with the IMF in its letter of intent (LoI) in December 2009.
The ever mounting inefficiencies in the power sector, however, resulted in a massive overrun of the initial target as the inter-disco tariff differential nearly doubled the target to Rs108 billion in fiscal year 2010. It sounds even worse, when seen in the context of the initially budgeted allocation of tariff differential of a mere Rs12 billion at the beginning of FY10.
The FY11 budget document was enough to create worries that there might well be another round of tariff hikes as the governments budgeted subsidies includes an allocation of Rs32 billion for inter-disco tariff differential.
Interestingly, this allocation is in sharp contrast to the line earlier toed by the government in May 2010, in its letter of intent to the IMF.
The May 2010 LoI clearly states that there would be no tariff differential subsidies in FY11 and that measures are in place to fully recover the power purchase costs through monthly price adjustments.
Since its hard to imagine a budget being prepared in Pakistan without consultation with the IMF, the allocation of Rs32 billion as subsidy for inter-disco tariff differential is either a very bold step, or a step that is intended to be a façade, and that the government will eventually withdraw the said subsidy to meet both IMFs conditions and its own fiscal gap targets.
In all likelihood, its the latter. As soon as the government will realize that meeting the deficit target will be a Herculean task, it will likely withdraw the subsidies by increasing power tariffs throughout the year, in line with the May 2010 LoI.
The withdrawal of this Rs32 billion subsidy implies, according to experts, a 25 percent hike in electricity tariffs at the least. And if the floods wreck the countrys power infrastructure, mounting losses would force the government to increase power tariffs furthermore.
In the meanwhile, the circular debt continues to haunt the sector with no signs of fading away anytime soon. The persistence of this inter-corporate debt could lead to increased debt payments on TFCs, only to result in additional burden on the end consumers.