Gas tariff hike to bode well for Pakistan in upcoming IMF review: brokerage house

The Economic Coordination Committee’s (ECC) decision to increase gas prices will help Pakistan reach an agreement with the International Monetary Fund (IMF) in the upcoming review scheduled in November, said Topline Securities, a brokerage house, in a report on Tuesday.

“We believe this [decision] is necessary as gas circular debt has now reached Rs2.1 trillion and increasing at the rate of Rs350-400 billion per year as per the energy minister,” said Topline Securities in a report on Tuesday.

“The IMF has also been a key proponent of reducing circular debt by increasing gas tariffs as it is increasing huge burden on the government’s fiscal account. We believe this, along with rationalisation of power tariff, will take Pakistan to the staff level agreement for its upcoming November review,” it said.

On Monday, the ECC, after deliberation, approved the summary as per the tariff schedule submitted by the ministry, prospectively w.e.f. 1st November 2023, instead of 1st October 2023.

An official, on condition of anonymity, told Business Recorder, the schedule moved by the Ministry of Energy was approved by the ECC.

As per schedule, proposed increase in local gas tariff was up to 173% for non-protected domestic consumers, over 136% for commercial, 86% for export, and 117% for the non-export industry.

Meanwhile, the Pakistani authorities are expected to meet the IMF on the upcoming review of the $3-billion loan programme in November.

The Ministry of Finance (MoF) has asked all ministries and divisions to be ready for the first review of the IMF Standby Arrangement (SBA) to ensure successful completion of the review, official sources told Business Recorder.

Meanwhile, the brokerage house also gauged the impact of gas tariff hikes on various sectors.

“The increase in gas tariffs will reduce gas tariff differentials for Sui Southern Gas Company (SSGC) and Sui Northern Gas Company (SNGP) which will be cash flow positive for the companies.

“The combined revenues of both Sui companies was around Rs1.6 trillion which will improve substantially following this gas price increase as tariff differential reduces,” said Topline Securities.

Moreover, gas price hike will be cash flow positive for exploration companies including Oil & Gas Development Company (OGDC) and Pakistan Petroleum (PPL) as gas circular debt reduces, it said.

“ECC has also proposed an increase in gas prices for MARI consumers including Fertilizers which will be positive for the company.”

“We believe the gas prices hike is likely to improve SNGP’s revenue stream and help to pay its debts. Thus, it will be beneficial for Pakistan State Oil’s (PSO) cash flows and working capital needs,” said the brokerage house.

However, the gas hike will not bode well for the chemical sector, noted Topline Securities.

“The chemical sector is likely to be significantly impacted as gas prices constitute a major part of company’s total cost and impact is unlikely to be passed on to final consumers. We estimate EPCL to have an negative impact of Negative Rs3.6/share or 45% of earnings on 117% increase in gas prices from Rs1,200/mmbtu to Rs2,6000/mmbtu,” it shared.

Moreover, the impact of the latest gas hike is expected to be neutral for fertilizer, textile, cement, steel and IPP sectors.