The International Monetary Fund (IMF), in its Sixth Review has unveiled that stock of circular debt is estimated to be Rs 540 billion, around 2 percent of GDP. According to the report, as of January 2015, arrears in the power sector stood at nearly 2 percent of GDP.
The IMF staff observed that much progress has been made under the programme in reducing budgeted subsidies; the problem of the off budget "circular debt" still generates some 1 percent of GDP in losses per year and periodically threatens the functioning of the energy system. An ambitious approach reducing these losses will improve energy supplies, fiscal sustainability, and will place the Pakistani economy in a position for sustained higher growth.
To stem further accumulation of arrears in the system, the authorities issued policy guidelines requiring the electricity regulator NEPRA to reflect additional efficiency costs in the next tariff determination. With the latest increase in the electricity tariffs, distribution companies (DISCOs) began to recover part of the costs stemming from technical losses and under-collections. Over time, the flow of new circular debt is expected to be eliminated. The stock would likely be dealt with via some form of conditional transfers, although this remains under discussion.
In the first half of FY2014/15, revenue-based load shedding produced moderate improvements in collections from private consumers (by 2.2 percent) and the agricultural sector (by 3.1 percent). However, during the same period, collections from the public sector declined by 7.5 percent due to payment delays from one government department. The federal government will take action to deal with this department. To strengthen the management of DISCOs, the authorities replaced some chief executives of poorly performing companies. Finally, several DISCOs have been included in the authorities' privatisation plans.
The vacancies on the board of the regulator NEPRA were filled in November. Preparations for a multi-year tariff framework are on track, with a view towards implementation with the FY2015/16 determination. The amendments to the Penal Code of 1860 and the Code of Criminal Procedures 1898 were enacted in March 2015, which will allow DISCOs to tackle electricity theft through stipulating it as a criminal offence.
The notification of new gas prices was postponed for a second time and is now planned for July 2015.
Staff expressed concerns about this delay and urged the authorities to reconsider unification of determination and notification with the regulator-Oil and Gas Regulatory Authority (OGRA).
The authorities remain committed to full pass-through of the cost of imported LNG to the end-user purchase price (including Compressed Natural Gas) as it comes online. The conversion of existing domestic gas concessions to higher producer prices (under the 2012 Policy).
The authorities are also planning to award contracts for an additional 10-15 exploration fields by June 2015 to help tackle the gas shortages.
The authorities' decision to accelerate the accumulation of foreign exchange reserves is a wise response, the sixth review notes. Despite some negative tax implications, the positive shock to energy prices can also be used to accelerate the reduction in electricity subsides and to tackle the persistent problem of payments arrears in the sector, without increasing consumer prices.
The Ministry of Water and Power is mandated to submit quarterly reports to the IMF key power sector statistics as follows; (i) cumulative monthly subsidy position (Rs billion);(ii) PEPCO month end payables and receivables positions and aging schedule, (Rs Billion) receivables positions - total and Disco-wise break-up; (iii) CPPA/PEPCO month-wise consolidated cash flow AT&C statistics. Monthly TDS claims by DISCOs and total inter corporate circular debt sheet prepared by Ministry of Finance;(iv) DISCOs consolidated income statement net electrical output & power purchase price by source, GWh;(v) generation, demand and shortfall for FY10 to date; (vi) net electrical output (MkWh) plant and fuel-wise detail;(vii) working capital loans for each loan type;( viii) energy arrears ( within 45 days of the end of each month for government arrears);(ix) determined and notified tariff's for each user and user group.
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