Finance Minister Shaukat Tarin, in a press conference after his return from Dubai where the scheduled quarterly review with the International Monetary Fund (IMF) staff took place, revealed that a 12 percent increase in power tariff would be effective from January 2010.
The decision to raise electricity tariffs was taken in principle last year in November and was the outcome of negotiations between the IMF and Pakistan - negotiations which eventually led to the approval of a 7.6 billion dollar assistance package. There were two areas of concern for the IMF, with respect to energy sector's performance and the required reforms as revealed in the Letter of Intent (LoI) submitted by the government to the Fund Board.
First, it was agreed to eliminate oil subsidies by December 2008 and electricity subsidies by June 2009, the main reason behind the burgeoning budget deficit with its negative impact on all major macroeconomic indicators. And, second, the government committed to preparing a plan for eliminating inter-corporate debt by end March 2009.
Seven months later, on 7 August 2009, the government submitted the third LoI as a prerequisite to the release of the third tranche wherein it committed to increasing average electricity tariffs, in stages, to ensure that they reach cost recovery in August 2010. The document also noted that the additional need for tariff differential subsidy of Rs 55 billion in 2009/10 would be absorbed by the budget.
The government was required to notify tariffs according to the agreed tariff adjustment schedule. Circular debt was agreed to be 'assumed by the government (Rs 277 billion) contracted by companies over the past few years on account of insufficient tariff and unpaid subsidies'. In this context, the recent revelations that the presidency, provincial governments, FATA and AJK all owe money to Pepco, as well as the non-payment by PSO to oil refineries which is compromising their capacity to pay for crude, must be a source of serious concern to the Fund staff.
The IMF delegated responsibility for monitoring the government's compliance on electricity sector reforms to relevant international financial institutions, namely the World Bank and the Asian Development Bank. It is significant that World Bank's Economic Update for Pakistan for September 2009 states that "reforms to strengthen financial sustainability of the electricity sector have stalled...the government failed to follow through on commitment.
The authorities recommitted in July 2009 to a tariff adjustment schedule and to the introduction of automatic tariff adjustment mechanisms with a view to eliminating tariff differential subsidies by July 2010. But the implementation of the agreed measures has so far failed again." The fourth LoI has so far not been released.
Shaukat Tarin has stated that its draft is currently being reviewed by the IMF staff who may make adjustments, if they deem them appropriate, which would then be signed by Tarin only if the changes are acceptable. Critics argue that the cash-strapped government would sign on the dotted line without quibbling on the conditions and would rely on providing justification for non-compliance, as and when, that state of affairs occurred.
Be that as it may, it is relevant to note that even though the public is genuinely concerned about the announced rise in energy rates due to the erosion in their real incomes, yet public anger is unlikely to be directed against the government if it can ensure that load-shedding is minimal.
Unfortunately, this seems unlikely as the vocal Minister for Water and Power has been quiet recently as he has failed on his promises namely to end load-shedding by December this year and to ensure that generation capacity would be increased by 2250-MW. High-energy rates and significant load-shedding is unlikely to appease any one.