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July 31, 2020

Govt will have to raise power tariff by 30pc to revive IMF programme

Top Story

July 31, 2020

ISLAMABAD: In a bid to revive the stalled $6 billion IMF programme, the government will have to hike electricity tariff by around 30 percent and put in place a viable plan to erase the monster of circular debt.

Background discussions with top government functionaries as well donors’ representatives in Islamabad told this correspondent on Thursday that without undertaking comprehensive structural reforms, the power sector woes could not be minimised. “The patchwork cannot deliver anymore, so serious reforms are required to erase the monster of circular debt in gradual but sustained manner,” they said.

The circular debt already peaked to Rs2.2 trillion and it increased at supersonic speed in the aftermath of outbreak of COVID-19 pandemic. Now the government will have to take corrective measures to stop its accumulation because if it was not curtailed then there would be addition of Rs500 billion in the current fiscal year.

The status quo approach will provide no solution so it is hoped that the government will come up with viable plan to minimise both stocks and flows of this problem,” said the official sources.

The Ministry of Finance alarmed Prime Minister Imran Khan after which the Subsidies Cell was established under supervision of former secretary finance Dr Waqar Masood. The Ministry of Finance through a circular issued on July 23, 2020 stated that the prime minister is pleased to appoint Dr Waqar Masood as head of newly established Subsidies Cell.

With change of guard at the Power Division with appointment of Omar Rasul, there is hope that the ministry would come up with comprehensive plan and to implement it in order to come out from the increasing mess on cash bleeding power sector.

On power tariff hike, there will be three heads coming under consideration including fuel price adjustments (FPA), quarterly adjustments and placing new tariff so the rough estimates suggested that the government would have to increase electricity tariff by around 30 percent. There is no alternate but to hike the tariff immediately because delays would escalate the requirement for increasing more prices of electricity, said the official.

The government has not yet passed on tariff for K-Electric consumers despite getting approval from the ECC. It was shocking for Adviser to PM on Finance Dr Abdul Hafeez Shaikh and his economic team that the ministers sitting in the ECC favoured the decision to pass on raise in power tariff to consumers but in the federal cabinet they opposed it on political grounds.

A top official commented that the government would have to make up its mind that whether the decision making would be made on economic grounds or political consideration would be given top priority because uncertainty would lead us nowhere so it would cause loss on both political and economic grounds.

When contacted, Dr Khaqan Najeeb, who had earlier served as Adviser to Ministry of Finance, told this correspondent on Thursday that power sector sustainability is a lifeline for the economy. Key issues need to be resolved.

He said reducing line losses and increasing recoveries are a must which if left unhandled can add Rs200 billion in FY-2021 to circular debt.

In addition, key issues of AJK and tribal districts power payments remain unsettled. Tax issues of uncollected GST and late payment surcharge payable on the whopping payables of around Rs1,200 billion will further aggravate circular debt levels.

Passing quarterly and yearly tariff in a staggered manner may be difficult but necessary, he added. Dr Khaqan emphasised on a medium-term horizon commercial orientation of Discos (power distribution companies), generation mix management and increased supply are likely to help. Rs509 billion is owed by private sector to government in power payments and large numbers are running defaulters. A change in law to declare non-payment as an offence as in the case of bounced bank cheques is the solution, he concluded.