Old prescription

Pakistan’s current account balance turned negative in December 2020, when it witnessed a deficit of $662 million after achieving a surplus consistently in the last five months (July-November) period in the current fiscal year 2020-21.

As we had mentioned in previous articles, there existed several underlying problems and the financial account continued to remain in the negative zone despite achieving surplus on the front of the current account balance.

Increased import demand played a major role in turning surplus into deficit on the external account front of the economy. This situation might have worsened more if the foreign remittances did not rescue the economy by achieving more than $2 billion consistently in the last six months period.

With the turning of the current account balance from surplus into negative, the need to revive the International Monetary Fund (IMF) programme has become significant. It is now clear that Pakistan did not have any other option but to go back to the IMF programme.

The IMF team was awaiting the outcome of Pakistan Democratic Movement (PDM) campaign for ousting the PTI-led regime. Now the stage is set for reviving the IMF programme, as the government took steps to hike the electricity tariff by Rs1.95 per unit.

The second important step is on cards under, which the government is going to promulgate through a Presidential Ordinance is to abolish corporate sector income tax exemptions, knowingly it would become effective for all practical purposes from the next fiscal year with effect from July 1, 2021. The IMF’s Executive Board could be satisfied with removal of tax exemptions, but it will become effective for taxpayers beginning the coming financial year.

Let us analyse the reasons behind tariff increase. The PTI government could not find other solutions to the problems, so it implemented the old prescription of hiking the hike the electricity tariff for fixing the cash bleeding power sector.

The increased power supply and the inability to reform the tariff left the government with no option but to hike the tariff.

Different ministers of government have blamed the previous Pakistan Muslim League-Nawaz (PML-N) led regime, and argued that the previous government contracted 22,000MW which was way beyond the country’s requirement in order to mint money, leaving consumers in great misery. If Pakistan’s GDP was increasing annually by 7 percent even then only 10,000MW was needed, they argue.

Now the total capacity charges stand at Rs860 billion which the government has to pay to the power companies in the backdrop of the fact that surplus power is available without any demand on the consumption side. The last PML-N government increased supply side of electricity by adding 10,000 to 13,000MW into the national grid assuming that the country’s GDP growth would rise on an average of 5 percent per annum, while the demand of electricity would increase by 5 to 8 percent annually.

But on the contrary the country’s GDP growth plunged into negative 0.38 percent. Since the country had surplus electricity, the government was forced to pay Rs860 billion as capacity charges. Under the tough terms of the agreement the government has to purchase electricity from the power plants built under China-Pakistan Economic Corridor (CPEC). In summers 25,000MW power is used but the government is forced to pay for capacity charges of 11,000MW unused power.

Under these circumstances, according to a source, the government was left with only two option- to pay the deficit by increasing the tariff or take external loans.

The government hiked the power tariff by Rs1.95 per unit for implementing base tariff for 2019-20 which had increased from Rs13.35 to 15.30 per unit. Thus, with quarterly adjustments the overall average tariff was Rs16.50 per unit in the country.

Now, the capacity charges of the power sector will rise to Rs1,400 billion by 2023 leaving the government with only two options of either to sell the extra supply and recover the capacity payment or further hike tariff to burden the voiceless consumers.

The government increased the supply side but it could not reform the tariff regime. Many experts believe that the government should have granted 2,000 to 4,000 megawatt connections for increased consumption to recover the capacity charges through increased consumption. Secondly, the government could replace furnace oil-based plants with RLNG plants as it would bring desired efficiency by reducing the cost of electricity.

When contacted, Dr Khaqan Najeeb, who had served as Advisor to the Ministry of Finance said, the power tariff regime needs serious reforms. Pakistan is still continuing with a demand constraining tariff regime. As consumption increases, so does the tariff for every sector to curtail higher demand. He suggested that with addition of 13,000MW surplus availability in the past few years, we should have moved toward a marginal tariff regime. Dr Khaqan felt this would have incentivised a higher demand bringing the per unit fixed cost down. The total capacity payment for 2020 stands at Rs860 billion. In addition, following merit order in running the plants ensures the cheapest source energy is used in making electricity. Taking out RFO plants and using the 62 percent high efficiency-based RLNG plants to full capacity could help keep the tariffs reasonable.

He emphasised it as the most important to improve recovery and cut line losses, which were causing a loss of Rs185 billion yearly. In addition, the subsidised tariff for Azad Jammu and Kashmir, and Balochistan tube-wells have an impact of Rs100 billion. This highlights the need for moving to targeted subsidies, adequate budgeting of subsidies and their timely payment.

Dr Khaqan felt in the medium-term indigenisation of supply was the real solution for managing a reasonable tariff. The excess supply currently gives the country room to work on building hydel capacity, he added.

Islamabad would have to submit State of Pakistan (SBP) amendment bill before the Parliament for reviving the Fund programme.

All these measures could help revive the IMF program, but it is yet to see whether the IMF would approve second review and release of third tranche or approve second and third reviews simultaneously for releasing third and fourth tranche of $450 million each.

The writer is a staff member