EDITORIAL: The IMF (International Monetary Fund) has taken a rather sombre view of Pakistan’s structural issues in its most recent Country Report; of which, the energy sector stands out yet again. The circular debt stock combined for power and gas sectors had crossed a staggering Rs 5,000 billion or 6 percent of GDP by March 2023, whereas Pakistan’s tax-to-GDP is barely 10 percent of GDP.
The IMF’s and Pakistan’s estimates put the circular debt flow overruns in nine months of FY2023 at Rs 387 billion. The buildup is staggering as it comes despite aggressive tariff revision in July 2022 when rebasing caused a Rs 8 per unit hike in the average national tariff.
The Circular Debt Management Plan was also implemented in phases aimed at reducing untargeted and unbudgeted subsidies. Removal of previous slab benefit was described as the pinnacle to arrest the flow of circular debt. Quarterly adjustments were made in a timely manner throughout FY23, yet the buildup of circular debt suggests the efforts were not aimed at the crux of the problem, which is inefficiency of the system.
The IMF and other multilateral agencies have long singled out revenue measures as the key to energy sector reforms. System inefficiencies, especially in the distribution sector, fail to attract more than lip service and broad suggestions. Consider that nearly Rs 250 billion of the FY23 circular debt stock pertains to under recovery in billing and distribution losses over and above the allowed limit.
Pakistan’s billing collection has stayed close to 90 percent, whereas the revenue requirement assumes 100 percent recovery. The circular debt menace will never go away without addressing the elephant in the room, i.e., transmission and distribution (T&D) inefficiencies.
While Pakistan authorities have committed to not introduce unbudgeted subsidies for FY24 and continue timely implementation of periodic adjustments, simply passing on the transmission and distribution inefficiencies to the end consumer will only be counterproductive. There is enough evidence that suggests T&D losses tend to go up and recoveries go lower when tariffs are increased substantially.
Pakistan’s national average tariff today is close to Rs35/unit – almost double from two years ago. There is very little that can be done to create incremental demand on the national grid during low economic growth cycle. And when tariffs are increasing like they are, there is every likelihood that demand will come under further pressure. The proof is in the pudding — a decline of 10 percent year-on-year in FY23 electricity generation numbers says it all.
What makes matters worse is the fact that the capacity charge component of Power Purchase Price constitutes over 70 percent of the energy generation cost. The only way to lessen the impact in unit terms is to find ways to broaden the denominator, i.e., demand.
Pakistan’s electricity usage per connection has stayed stagnant for nearly 13 years as a direct consequence of a failure to find more usage cases and abrupt tariff revisions. Taxes, surcharges, and duties to make up for the inefficiency now amount to over one-third of the final price paid by the consumer.
The energy generation mix is much improved from yesteryears, but Pakistan has been unable to take full advantage of that because of lopsided IPP (independent power producer) contracts done in haste, resulting in high capacity charges, curtailed demand growth, and the never-ending menace of T&D losses and low billing collection.
Unfortunately, the IMF prescription has also been found wanting, overly reliant on revenue measures disguised as sector reforms. The likes of Bangladesh have halved their T&D losses into single digit in the last ten years by investing heavily in distribution system overhaul. Pakistan, on the other hand, continues to struggle to bring the losses down from the national average of 16 percent.
It is about time that the authorities realised the magnitude of the problem and did what it takes. It is not something that has been done in emerging markets recently.
The solutions and the policy actions to arrest the slide have been catching dust somewhere in Islamabad for well over a decade. A comprehensive action plan of getting Pakistan’s energy sector priorities right was laid out in 2009 by the Energy Experts Group, that never really got the attention it deserved.
The core of the problem has not changed; only the magnitude has. It is about time the authorities, with or without the IMF, embarked on actual reforms. And that must go beyond the rabbit hole that the power tariff increase is fast becoming.
Copyright Business Recorder, 2023