Pakistan to resume semi-annual gas tariff notification, IMF assured

ISLAMABAD: Pakistan has made commitments with the IMF to resume issuance of semi-annual notification of gas tariff in the wake of increased imports of Liquefied Natural Gas) LNG, updating plan to limit accumulation of new payables and gradually eliminating outstanding stocks of power sector’s circular debt as well as divestment of the Kot Addu Power Company (Kapco) till July 15, 2016.

Under the new structural benchmarks agreed with the IMF, Pakistan signed agreements with the Fund to update the plan to further limit the accumulation of new payables and gradually eliminate the outstanding stock of payables arrears in the power sector till July 15, 2016. It has also committed to solicit expressions of interest for the divestment of Kot Addu Power Company (Kapco) till the mid of the ongoing month.

After release of the IMF staff report, the Fund Mission Chief Herald Finger through video conference from Washington DC on Tuesday evening said that the overall circular debt and its stock stood at Rs666 billion or 2.2 percent of GDP and the new plan for erasing it would be made because the government had brought changes in its earlier plan to tackle it through privatisation of power distribution companies. Now the plan was changed as the government had abandoned its plan to find out strategic partners by privatising it so a new plan would be finalised to find ways and means for erasing arrears and stocks of circular debt, he added.

On $46 billion China Pakistan Economic Corridor (CPEC), he said that Pakistan would reap benefits on short to medium term but on long term basis the country would have to face risk because of repatriation of profits by the companies. “So far whole information is not available but it still remains manageable,” he added.

He also said that Pakistan officially communicated about its plan not to seek further financing after graduating from the existing Extended Fund Facility (EFF) in coming September 2016. However, the IMF would continue different engagement under the Post Programme Monitoring (PPM) and Article IV consultation on biannual basis for a few years.

On a question of debt sustainability, the IMF chief said that Pakistan seemed sustainable as the foreign debt in terms of GDP ratio stood at around 26 percent which the country could sustain for repayment purposes even without the IMF’s package.

On gas tariff, the IMF’s staff report states that the regulatory process for gas tariff determination has resumed and the growing LNG imports are strengthening supply to the domestic market.

The Pakistani authorities are resuming semi-annual notification of gas tariffs, key to ensure cost recovery and strengthen the regulatory framework. They are increasing imports of Liquefied Natural Gas (LNG) to tackle domestic gas shortages, with the price of imported LNG continuing to be fully passed through to consumers. Staff welcomed the authorities’ commitment to further reduce the distribution losses, including by strengthening the infrastructure and tackling gas theft.

The authorities remain committed to their Fund-supported economic policy and structural reform agenda but continue to face significant challenges. “These include increasing political polarisation, social and political obstacles to privatisation of public sector enterprises (PSEs), and ongoing legal challenges to tax revenue and power sector measures. The security situation has improved but remains fragile amid fallout from terrorist attacks and widening anti-terror operations,” the IMF staff report added.

Further accumulation of international reserves and greater exchange rate flexibility will help bolster external buffers and reduce vulnerabilities. The authorities are committed to continue with the SBP’s spot purchases and take advantage of favorable oil prices to continue raising foreign exchange reserves. The IMF staff supported the authorities’ plan to increase the end-June 2016 NIR target by $350 million, which will contribute to further bolstering external buffers, containing appreciation pressures on the real effective exchange rate, and hence supporting competitiveness.

Discussions took place in the context of a difficult political and security situation and focused on the FY 2016/17 budget, strengthening macroeconomic resilience, and advancing key structural reforms to foster higher and more inclusive growth. The authorities are committed to prudent monetary and fiscal policies, including strengthening accumulation of foreign currency reserves and continuing gradual fiscal consolidation in FY 2016/17 while protecting the most vulnerable.

They also intend to (i) follow through on delayed reforms to establish deposit insurance and notify multi-year power tariffs, (ii) strengthen the tax administration, (iii) reinforce efforts to improve the power sector and reduce related arrears, and (iv) restructure and attract private sector participation in ailing PSEs while containing their financial losses. Outreach activities included a press release and a joint press conference with the finance minister and central bank governor.

Pakistani authorities told the IMF that they are in the process of updating their plan for reducing the accumulation of payables arrears and to gradually eliminate the outstanding stock. The plan adopted in late 2015 included steps to improve collections and reduce operating costs, losses, and price distortions in the tariff structure.

With this, the accumulation of payables would be reduced from Rs209 billion in FY 2014/15 [including the Power Sector Holding Company Limited (PHCL)] to under PRs 100 billion in FY 2015/16, with a view towards further halving new arrears accumulation by FY 2018/19. While some elements of the plan have not been fully addressed i.e., implementation in two regions and GST refunds, we have significantly over-performed the end-March 2016 IT on the flow of accumulation of power sector arrears, helped by the impact of lower oil prices, further loss reduction by better monitoring and management of power Distribution Companies (Discos) performance, and better mobilisation of receivables, including of some arrears at the provincial level. In the light of developments since adoption of the plan, including delays in the privatisation of Discos, we will, by June 15, 2016, prepare an initial update of our plan to further limit the accumulation of new payables and gradually eliminate the outstanding stock of payable arrears, on the basis of available information and in consultation with stakeholders. We will finalise this updated plan by July 15, 2016 under new structural benchmark (SB).

Macroeconomic stability has been strengthened and structural reforms are progressing. Since the start of the programme in September 2013, economic growth has gradually recovered, inflation was brought down to low single digits, foreign reserve buffers have been rebuilt, social safety nets have been strengthened, and the fiscal deficit has significantly declined (although public debt remains high).

International reserves continue to rise amid a broadly stable current account deficit. Despite declining exports and sustained real exchange rate appreciation, the current account deficit is expected to remain contained at 1.0 percent of GDP in FY 2015/16 and international reserves will likely further increase to 4.3 months of imports (76 percent of the ARA metric). Pakistan’s exports fell by 9.2 percent (y-o-y) during the first three quarters of FY 2015/16, owing to lower international prices of cotton and rice, ongoing security issues, a poor business climate, and competitiveness losses related to real exchange rate appreciation (1.3 percent y-o-y in March 2016 and cumulatively 19 percent over the past two years). However, favorable oil prices and so far robust remittances from the Gulf Cooperation Council (GCC) countries continue to counterbalance the decline in exports. The recovery in oil prices along with higher CPEC-related imports will likely lead to a widening of the current account deficit to about 1.8 percent of GDP in FY 2016/17, still allowing for additional reserves accumulation to close to four and half months of imports. “Over the medium term, completed CPEC projects would contribute to promoting exports, offsetting the CPEC-related imports of industrial goods for investments,” the IMF report concluded.