IMF not onboard with energy ministry’s tariff rationalisation, circular debt management plans

Putting to bed reports around the much-touted tariff rationalisation and circular debt management plans, the International Monetary Fund (IMF) said the proposals do not address the underlying problems of Pakistan’s energy sector.

“Restoring the viability of the energy sector is critical to Pakistan’s economic recovery and fiscal sustainability,” IMF Mission Chief Nathan Porter told Business Recorder via message on Monday.

“For this, it is essential for the government to focus on broad-based reforms, including to reduce the high cost of energy, improve compliance and reduce theft and line losses, end captive power, and fix the governance and management of the DISCOs, as well as keep up with regular tariff adjustments.

“In our view, the proposed plan does not address the underlying problems. In particular, the circular debt neutrality of the tariff rationalisation plan is doubtful and it would place a significant additional burden on vulnerable households.

“The circular debt ‘reduction plan’ entails fiscal risks given the chain of transactions involved and would also continue the use of supplementary grants which have placed a considerable burden on the fiscal accounts  in recent years. 

“We are open to working with the government and other international partners to advance a sustainable reform plan addressing the issues mentioned above which, if successfully implemented, would allow tariffs for all classes of consumers to fall.”

Porter’s remarks come after the interim government, already on numbered days, on Sunday dismissed what it called “negative perception” regarding the circular debt reduction and tariff rationalisation plans, saying “productive deliberations” have been made with the IMF.

IMF briefed about tariff, circular debt plans

According to the proposed rationalisation plan, tariff for the industry would have been slashed between Cents 8.5-11.75/kWh from cents 14 per unit through subsidy neutral proposal. However, protected categories of consumers would have been further loaded from Rs50 to Rs450 per month fixed charges to minimise cross subsidy.

Meanwhile, the energy sector circular debt stock of Rs1,268 billion would have been settled using funding from the government of Pakistan.

Pakistan is currently enrolled in a $3-billion Stand-By Arrangement with the IMF, and has received two tranches of the programme. A final review is expected next month, which would pave way for an inflow of nearly $1.1 billion.

However, many analysts believe Pakistan will need yet another IMF bailout given the dire straits of the economy.

Market reaction to development

The KSE-100 reacted negatively to the development with OGDC and PPL bearing the most brunt of it at the start of trading on Tuesday.

The share price of OGDC opened at its lower limit at Rs124.14, a fall of Rs10.06. PPL also hit its lower cap at Rs99.92, a decrease of Rs8.10.

OGDC’s share price had hit Rs158.59 last week before reports of IMF’s disapproval to the circular debt management plan began gaining traction. PPL hit a high of Rs137.9 before beginning its descent.

The article, originally published February 12, 2024, was updated on February 13, 2024 to incorporate market reaction to the development