IMF review: MoF takes step towards ensuring desired outcome

ISLAMABAD: Ministry of Finance (MoF) has asked all Ministries/ Divisions and entities to meet commitments made with the International Monetary Fund (IMF) within the stipulated time to ensure successful completion of the review, as well as the overall programme, well informed sources told Business Recorder.

These instructions, sources said, have been issued by Secretary Finance, Imdadullah Bosal, in letters to all the Ministries/ Divisions and entities.

According to sources, Secretary Finance has stated that the second review under the Stand-By Arrangement (SBA) is scheduled to be held in February 2024; therefore, it is critical that all commitments including Structural Benchmarks, Quantitative Performance Criteria, Indicative Targets and other commitments related to 2nd Quarter are met as agreed with the IMF.

The Memorandum of Economic and Financial Policies (MEFP) agreed with the IMF provides the following relevant to each Ministry/ Division/ Organization/ Wing:

IMF scheduled to consider first review of $3bn SBA on Jan 11

NEPRA and Power Division are to submit update on containing spending, especially by limiting energy subsidies, as also to be reflected in the cabinet-approved update of the circular debt management plan (CDMP) for FY24 by end-July 2023, primarily through notification of the Annual Rebasing (AR) of the power tariff for FY24 in full and with effect from July 1, 2023 as determined by the Regulator in July 2023, continuation of regular tariff adjustments in line with established formulas in a timely manner, and acceleration of structural cost-reducing reforms.

NEPRA will continue with automatic notifications of regular QTAs and FPAs in line with established formulas in a timely manner, supported by Finance Ministry’s efforts to spare the protected slabs (as this will help both achieve cost recovery and increase the progressivity of the tariff structure for residential consumers, as intended by the 2022 residential subsidy reform).

To this end, there will be further strengthening cooperation between the Discos, Ministry of Power, and NEPRA to facilitate swift petition and determination processes.

After the residential subsidy reform in 2022, the government has taken, supported by the World Bank, the next step in the country’s multi-year subsidy rationalisation plan that focuses on tube-wells for large agricultural users.

In Punjab, Sindh, and Khyber-Pakhtunkhwa provinces, the first phase of the reform will remove the government subsidy only.

For this reform, the plan is to seek approval from the cabinet and NEPRA on a concrete proposal by endFY24, with implementation to begin in FY25Q1.

The second phase will focus on elimination of one third of the cross subsidy for tube-wells with implementation to begin in FY 26. Finance Ministry is also exploring various options to replace agriculture tube-well subsidies in Balochistan.

The Authorities had also apprised the IMF that they have started to accelerate various programmed structural reforms with the help of the World Bank, ADB, and other donors (supported through well-prioritised and complementary conditionality in their programs) that are aimed at reducing commercial and technical losses, improving governance and PPA terms, increasing competition and reducing generation costs and greening the energy mix in FY24.

The Authorities had also assured the Fund that they will continue to renegotiate remaining Power Purchase Agreements (PPAs) in return for clearing un-guaranteed CPPA-G arrears.

The Authorities had also promised to settle up to Rs 310 billion earmarked for IPPs and Government Power Producers (GPPs) with revised PPA terms, using the established contract structure (10- year floating-rate PIBs and5-year Sukuks in equal parts, or more efficient financial instruments.

Finance Ministry has sought update on commitment, according to which the Authorities stated that they have created fiscal space to settle the Rs 82 billion falling due in FY24 from the budget and will roll over the public guarantee for the remaining Rs 683 billion. With regard to improvement in efficiencies of Discos, the Authorities had informed the Fund that as the most critical part of managing the circular debt flow, they have taken measures toward improving Discos’ efficiency and governance (also supported by the new SOE law and policies).

Towards this end, Authorities plan initiation of work on a number of prior requisites needed for such transactions which include engagement of Transaction Advisor by end FY24. The transaction advisor will require 18 months to develop structure and way forward.

On anti-theft procedures, Authorities have informed IMF that their enhanced and sustained anti-theft efforts, which have yielded PRs 46 billion from September 7 to October 31, 2023, are expected to improve collections while demonstrating commitment to reforms in this area to potential concessionaires.

“The sustainability of our anti-theft campaign requires the institutionalization of these recent initiatives. Formal approval of an antitheft law by the legislature, including the creation of a dedicated police force for all Discos and the recognition of electricity theft as a cognizable offence, is necessary for improved Disco governance and improved enforcement capability,” Finance Ministry instructions note.

In addition, an independent monitoring system through officers outside the Discos for 2500 high loss feeders has been initiated.

Other reforms, most notably are: (i) accelerate the green energy transition as per the 2021 National Electricity Policy, which mandates an increased share of variable and cheaper renewable energy in the generation mix. Progress toward this was recently made with the update of the IGCEP in 2022.

As an annually updated plan, the Authorities are currently working on Integrated System Planning that includes a 2024 IGCEP to be accompanied by the first ever Transmission System Expansion Plan (TSEP). Both plans will be submitted to NEPRA for approval in April 2024; and (ii) seek NEPRA’S approval of the Commercial Code to set the procedures, rights, and obligations that govern trading in the new wholesale market (expected to be launched in April 2024) and thus to improve the efficiency in wholesale market. The rules and eligibility criteria as of 4rh September, 2023 for key market entities expected to be launched beforehand, as per the NEPRA Act have been notified.

As per the established principle, the Authorities will promise that they will strive to reduce capacity payments, as the government pays arrears, either by renegotiating PPAs with a new strategy or by lengthening the duration of bank loans, depending on adequate budget space and Circular Debt Management Plan (CDMP) implementation progress. The same principle applies to the assumption of PHPL amortization by the federal budget.

The Authorities will also continue to refrain from netting out cross-arrears (unless they are independently audited); using “non-cash” settlements (e.g., payables against the reimbursement of on-lent loans to Discos); and issuing government guarantees (e.g., for PHPL issued Sukuks to transfer CPPA-G payables to PHPL).

The Authorities also noted that they have asked Auditor General to conduct special audits of several SOEs (i.e., SSGCL, HESCO, and PESCO) because of their size and importance in their sectors.

The respective line Ministries are currently in the process of defining the scope and terms of reference in consultation with all relevant stakeholders, and plan to secure the necessary approvals for commissioning the audit by the end-FY24. Both Power Division and Auditor General have been asked to share update status of this commitment made with the Fund.

Copyright Business Recorder, 2023