Electricity Tariff Increase and IMF Negotiations
Tariff Increase:
Pakistan has notified the International Monetary Fund (IMF) that the average electricity tariff may increase by Rs5 to Rs7 per unit in July as part of an annual adjustment. This increase could result in about a 20% rise in the current base tariff, which is necessary to maintain the financial viability of the power sector. The Ministry of Energy has based this increase on petitions from power distribution companies.
IMF’s Response and Conditions:
During discussions with the IMF, it was revealed that the IMF has not approved the government’s proposal to reduce industrial power tariffs by imposing higher fixed charges on residential consumers using up to 200 units per month. The IMF remains cautious and has requested more detailed information on the assumptions behind the proposed tariff increase, suspecting that the actual necessary increase might be lower than projected by the Power Division.
Circular Debt and Financial Challenges:
Despite previous price hikes averaging Rs7 per unit over the last two years, Pakistan has struggled to reduce its circular debt, which may exceed the agreed target by Rs80 billion to Rs100 billion this fiscal year. The current fiscal year’s circular debt was expected to be maintained at Rs2.310 trillion, but ongoing inefficiencies and management issues in the power sector have hindered this goal.
Subsidy Dynamics:
For the next fiscal year, the Ministry of Finance has indicated a maximum allocation of Rs920 billion in power subsidies, though the final decision is pending. The anticipated tariff increase accounts for these subsidies. However, direct tariff differential related subsidies were originally estimated at Rs632 billion for the current fiscal year, with a significant portion of the burden shifted to residential consumers with higher consumption, as well as commercial and industrial users.
Policy and Reform:
The IMF has emphasized the importance of broad-based reforms to restore the energy sector’s viability. These include reducing high energy costs, improving compliance, and tackling issues such as electricity theft and line losses. The government’s plan to ease industrial tariff burdens by increasing residential fixed charges faced resistance from the IMF due to concerns about the additional burden on vulnerable households.
The government had proposed fixed charges ranging from Rs50 to Rs3,000 per month for all residential consumers, with lower charges for those in the protected category. This approach was meant to offset the subsidies provided to consumers using up to 400 units per month, which total Rs592 billion, including Rs375 billion for lifeline and protected consumers.
The IMF has maintained that ensuring the financial sustainability of Pakistan’s energy sector is crucial for the country’s economic recovery and fiscal health, requiring careful management of subsidies and tariff structures without unduly burdening any particular group.
