If the Budget Strategy Paper (BSP) 2011-14 is anything to go by, the government is all set to breach earlier commitments made to the IMF regarding the elimination of power sector subsidies. It was communicated to the IMF in the Letter of Intent in May 2010 that the inter-disco tariff differential subsidy will be eliminated by June 2011.
It is not clear whether the government has communicated to the IMF its plans for continuing the tariff differential subsidy for another year at least, as outlined in the strategy paper. What remains a matter of concern is that the government is banking strongly on some power sector
eforms that have supposedly taken a stronghold, hence causing the expectation that there will be no more subsidy required come July 2012.
The amount allocated for power sector subsidy in the strategy paper is Rs147 billion - a massive 168 percent increase from the previous years allocation of Rs87 billion. Why such an increase when you are supposed to be moving towards gradual elimination of subsidy, one may ask.
It is probably because the government has realised the gravity of the situation and also that realism is the best way to go.
Deviation from the budgeted amount is a common phenomenon in Pakistan and the power sector subsidy is a perfect example of massive overruns. FY11 will be the third year running when the government has missed the subsidy target by a mile.
There are several reasons for this, of which, an unrealistic approach is one. The government never seems to factor in the political nature of tough decisions associated with the power sector - assuming that the cost will be easily passed on - only to end up creating more of a mess.
Moreover, the IMF directives seem to have a strong hand in budget formulation which forces the government to allocate a much lesser amount to subsidy, hoping to please the Fund and get the programme rolling. Furthermore, it is often the case that those sitting at the helm of affairs are overly optimistic about the resolution of the energy crisis - often leading to unrealistic budget allocations.
What is of great concern is the fact that the budgeted subsidy amount for FY12 is by far the largest in the countrys history. And never before has the government stuck to accommodate within the allocated amount, making matters even more troublesome for the fiscal managers.
An important thing to note is that only Rs50 billion have been allocated for the tariff differential, which makes the Rs147 billion amount look rather hefty. The tariff differential has traditionally occupied three-fourth of the power sector subsidy, with the remaining amount for Fata and payment of interests on TFCs. Where exactly will the remaining Rs97 billion be expensed, is anyones guess at the moment, but it does seem odd.
The government would give anything to keep the subsidy in check for FY12 and actually be able to eliminate the tariff differential - but for that to happen, sector reforms have to be taken up seriously. The government seems to be too complacent and is in complete awe of its step of reconstituting the disco boards.
Circular debt shows no sign of receding and the Rs120 billion recently injected as subsidy will have a telling blow on the fiscal deficit. Funny as it may seem, the BSP on circular debt says, "it is expected that the issue of the inter-corporate circular debt will improve...". This is the last thing that Pakistan wants.
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POWER SECTOR SUBSIDIES
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(Rs bn) FY09 FY10 FY11 FY12 FY13 FY14
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Budgeted 88 67 87 147 85 72
Revised 110 179 239* - - -
Deviation 24% 168% 174% - - -
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* = Does not include Rs120 bn issued in May 2011
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Source: Budget Strategy Paper 2011-14
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