Govt to take additional measures to overcome revenue shortfall

ISLAMABAD: Pakistan has made a commitment to the International Monetary Fund (IMF) to introduce additional measures in case of revenue shortfall, and to increase power tariff if the Supreme Court ruled against surcharges during the current fiscal year 2015-16.
“After achieving macroeconomic stability by Pakistan, now four major priorities are on cards including raising public finances, increasing GDP growth for creating jobs, widening of tax base and improving business climate through privatisation of loss-making entities,” the IMF’s mission chief for Pakistan Herald Finger told a select group of reporters in a video conference from Washington D.C on Thursday evening.
He said that on average 6-hour power blackouts continues in Pakistan, which is hampering growth. He said the recent deaths in Karachi because of power outages and heat wave are deplorable. The public reaction against these outages reinforces the demand to fix the problem on a permanent basis, he added.
The circular debt, he said, peaked to Rs615 billion at end-March 2015; payables comprise the circular debt (Rs280 billion payable to power sector entities) and the stock of arrears covered by the Power Sector Holding Company Limited (PHCL) Rs335 billion).
However, the IMF states in its report on the completion of the seventh review under $6.64 billion Extended Fund Facility (EFF) that to further mitigate risks to the IMF programme, several contingent measures have been identified and will be implemented in case the expected fiscal adjustment falls short of objectives.
If tax revenues fall below the level envisaged in the programme, the government will take additional revenue measures, including plan to eliminate Statutory Regulatory Orders (SROs) slated for FY2016/17.
On the expenditure side, Pakistan has made a commitment that it would again reduce expenditure allocations in the first nine months of the year to create a reserve against any shortfall. These measures could yield savings amounting to 0.5 percent of GDP.
One key risk relates to a recent court judgment, unfavorable to the authorities, on energy surcharges, which could see surcharges cancelled and refunded. The Supreme Court suspended the judgment and is expected to decide on this issue in due course.
“In case of a potential negative outcome, Pakistani authorities are committed to taking mitigating measures including tariff adjustments and, if required, suitable amendments to the National Electric Power RegulatoryAuthority (Nepra) Act that are in line with the best international practices and preserve Nepra’s independence.
The IMF report says the build-up of arrears in power sector is due to (i) significant non-recoveries related to government and private consumers; (ii) accrued interest on PHCL debt; (iii) line losses that are not recognised in the tariff; (iv) delays in the refund of excess GST collected by the FBR; (v) late payment surcharges and (vi) delays in tariff determinations.
Pakistani authorities plan to reduce the accumulation of payables. The plan includes steps to improve collections and reduce operating costs and losses. According to the plan, the accumulation of payables will be reduced from an estimated Rs175 billion in FY2014/15 to Rs113 billion in FY2015/16, with a view to further halving new arrears accumulation by FY2018/19.
Key elements of the plans comprise capital expenditures and revenue-based load management to reduce losses and improve collections. Overall losses are expected to decline by 0.5 percent and collections are expected to improve by 2 percent per year.
Taking advantage of the room created by low oil prices, late payment surcharges and higher system losses were incorporated into the FY2014/15 determined tariffs. This is expected to arrest a portion of the build-up of the circular debt and improve the cash-flow of the system.
The government will continue to work with some regional and local governments to prevent further accumulation of arrears. In addition, the stock of arrears is expected to be significantly reduced over the next three years, supported by privatisation and limited budgetary support.
The stock of PHCL debt will be transferred back to distribution companies (DISCOs), which will be privatised. This will help reduce the stock and ease the servicing of PHCL debt. In the meantime, a surcharge will be levied to service the PHCL debt. The authorities have allocated about 0.1 percent of GDP of budgetary resources to clear part of the stock of arrears that accrued with respect to some regional and local governments.
There are significant downside risks to the plan. In particular, delays in the privatisation programme and court challenges to the surcharges would set back the programme and increase the flow of payables. On the upside, the government can step up its efforts to further reduce transmission and distribution losses and increase collections, the report concluded.