There will be no new fuel subsidy or cross-subsidy schemes: Govt makes firm pledge to IMF

ISLAMABAD: The government has assured the International Monetary Fund (IMF) that it will not introduce any new fuel subsidy or cross-subsidy schemes in FY24 and beyond and refrain from netting out cross-arrears without proper due diligence and ex-ante independent auditing.

According to the second and final review under the Standby Arrangement (SBA), the circular debt (CD) stock stabilized in late 2023 and early 2024, secured by continued efforts to bring energy tariffs in line with costs and, in the power sector, continued anti-theft measures.

Power CD, at Rs 2.6 trillion (2.5 percent of GDP), has remained broadly flat since October 2023 after some slippage earlier in the fiscal year (due largely to lower-than-expected recoveries following the large annual tariff rebasing in July 2023).

In the gas sector, the authorities implemented another significant (24 percent on average) gas tariff increase on February 15. The change maintained a progressive rate structure to protect vulnerable residential consumers; significantly increased and equalized prices for fertilizer companies in the system; and modestly increased prices for captive power and some industrial users.

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With the April 1, 2024 notification of the delayed Q2 FY24 quarterly tariff adjustment, the continuation of anti-theft efforts, and the release of budgeted subsidies, the authorities should be able to meet their FY24 CDMP target of Rs 2.3 trillion (net zero stock accumulation).

Timely notification of the FY25 annual rebasing will be critical to the continued prevention of further CD flow, as will further collection efforts, including steps to enhance and institutionalize digital monitoring. In parallel, the authorities should press ahead with agricultural tube well subsidy reform, for which a finalized plan is targeted by end-FY24.

However, restoring energy sector viability requires strong cost-side reforms. This includes (i) continuing efforts underway to improve transmission infrastructure, including for better integration and expansion of renewable energy capacity; (ii) improving DISCO performance via either privatization or long-term management concessions; (iii) moving captive power demand to the grid; (iv) revisiting, where feasible, the terms of power purchase agreements; and (v) continuing to convert publicly-guaranteed PHPL debt into cheaper public debt.

Authorities have said they are committed to reaching the end-June goal of net zero CD accumulation and recognize that restoring energy sector viability will entail dramatically reducing the cost-side pressures of the energy sector while maintaining cost recovery tariffs.

They are committed to continuing regular, timely, and automatic notifications of adjustments to natural gas and electricity tariffs in a manner that is consistent with full cost recovery and to reduce natural gas price disparities between regions and industries and within industries.

They will also seek to find cost reductions and will accelerate structural reforms to address the sector’s fundamental issues, including reforming the governance of DISCOs; moving captive power demand to the electricity grid; finalizing a proposal on tube well subsidy reform by end-FY24; expanding renewable energy capacity in line with the IGCEP; improving electricity transmission and distribution efficiencies; and continuing to refine anti-theft efforts.

In the post-SBA period, we remain committed: (i) to protect low-income consumers through the progressive tariff structure, for both electricity and gas and avoid any subsidized or preferential industrial tariffs; (ii) not to introduce any new fuel subsidy or cross-subsidy schemes in FY24 and beyond; (iii) to refrain from netting out cross-arrears without proper due diligence and ex ante independent auditing; (v) not to use “non-cash” settlements (e.g., payables against the reimbursement of on-lent loans to DISCOs); and (vi) to avoid issuing additional government guarantees to entities in the sector except where a replacement guarantee is required on expiry of a previous guarantee. In FY25 we will seek to reduce or at least maintain the stock of CD through implementation of the above reforms.

However, the IMF has asked Islamabad for regular energy tariff adjustments and broader reforms to fundamentally restore energy sector viability.

According to the Fund “the authorities have stabilized the energy sector’s circular debt over the course of the SBA through timely tariff adjustments and enhanced collection efforts.

While these actions need to continue, it is also critical that the authorities undertake cost-side reforms to address the sector’s underlying issues and viability.

Continued regular energy tariff adjustments, keeping pace with costs, are necessary to end the creation of CD, but broader reforms are needed to fundamentally restore energy sector viability.

Pakistan’s progressive energy tariff structure continues to protect the most vulnerable, but in the long term this should be replaced by BISP cash transfers.

The regularization of energy tariff increases, in line with costs and legal requirements, represents a major step for the authorities in addressing Pakistan’s energy crisis. However, the only sustainable solution for the sector is decisive action to address cost-side and infrastructure issues.

Fund is of the view that restoring energy sector viability requires strong cost-side reforms. This includes (i) continuing efforts under way to improve transmission infrastructure, including for better integration and expansion of renewable energy capacity; (ii) improving DISCO performance via either privatization or long-term management concessions; (iii) moving captive power demand to the grid; (iv) revisiting, where feasible, the terms of power purchase agreements; and (v) continuing to convert publicly-guaranteed PHPL debt into cheaper public debt.

Copyright Business Recorder, 2024