“The Prime Minister doesn’t want increase in tariffs….”, the Special Assistant to the Prime Minister on Power and Petroleum was quoted in the press. The IMF does want increase in power tariffs. And lots of it. The proposed increase is anywhere from Rs3.5-4.5 per unit as per various reports emerging in the press, and a detailed look at the IMF country report. Mind you, this is an addition to Rs1.95 per unit recently added on account of base tariff and Rs1.62 per unit on account of quarterly tariff adjustment for 2Q and 3Q FY20.
So, what happens now? If Pakistan does what the IMF report says (and it says after long and detailed consultation with Pakistani authorities by the way), this will undoubtedly have direct inflationary consequences (read: Power tariff increase: Not worth it, published Mar 24, 2021)), and please the IMF. Not doing it will also have fiscal consequences, if taxes are reduced, and will not please the IMF one bit. It would be of note to mention here that tariff increase, and subsidy reforms, are both part of structural benchmarks. They are not your “less important” medium-term reform agendas like improvement in disco efficiency, reducing T&D losses etc, which the Fund can let go of.
It is quite a puzzle, but the best part is it will be solved either way pretty soon. The Q1 quarterly adjustments are due this month and the Fund expects the same to be timely implemented under the automaticity of the Nepra Act. Then the next two rounds of tariff increase are due in June and September, for annual rebasing and QTA, respectively. The impact on inflation has been previously discussed in this space. It is now a matter of the government’s willingness or the capacity to do what has been agreed with the IMF.
Nullifying the impact of base tariff increase via reduction in or abolition of taxes, would still keep the power system going, and transfer the burden to the tax revenues. One is not too sure if the fiscal projections have it in them to make room for a potential loss that could run up to Rs500 billion in lieu of taxes, if the impact is not passed on electricity consumers.
An equally important subsidy reform agenda is also going to be simultaneously carried, the first part of which has already been executed as per the IMF country report. The second and more detailed round will be conducted in the upcoming budget, and the inflationary consequences of the same need not be underestimated. But more on this tomorrow. For now, the decision time is near. The government indeed finds itself between a rock and a hard place.
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