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April 9, 2021

Commitments to IMF: Gas tariff to be revised in second half of current calendar year

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April 9, 2021

ISLAMABAD: Pakistan has made a commitment with the IMF under structural benchmark conditions for increasing the power tariff by over Rs5 per kWh till June 2021 while revising the gas tariff in the second half of the current calendar year.

With the amendments into the power sector regulator National Electric Power Regulatory Authority (Nepra) Act, the quarterly tariff adjustments will be implemented automatically in April, June and September 2021 and afterwards.

Under an ambitious fiscal adjustment plan, Pakistan has agreed with the IMF for making adjustments of around 3 percent of GDP ranging up to Rs1,500 billion through FBR’s taxation measures, hiking electricity tariff and jacking up collection of Petroleum Development Levy (PDL) up to Rs607 billion in the upcoming budget for 2021-22.

The overall budget deficit would be brought down from 7.2 percent of GDP in the outgoing fiscal year to 5.6 percent of GDP in the coming budget. The FBR’s tax revenues will be jacked up by Rs1,272 billion and annual tax collection target will be envisaged at Rs4,963 billion for upcoming budget 2021-22 against downward revised target of Rs4,691 billion for outgoing fiscal year 2020-21.

In order to align the tariff with cost recovery, the IMF’s Staff Report released on Thursday, under the $6 billion Extended Fund Facility (EFF) for Pakistan, stated that the federal cabinet approved a timetable for the outstanding power price adjustments, which include the FY2021 annual rebasing (AR, estimated as a PRs 3.34 per kWh hike in the base tariff) and quarterly tariff adjustments (QTAs, estimated as PRs1.63 per kWh to catch up with past deferrals).

As a first step (PA), the authorities notified the first-step AR of PRs1.95 per kWh in January 2021; completed the Q2-Q3 FY2020 QTAs of PRs1.63 per kWh in December 2020 as structural benchmark (SB) for end-January 2020; and implemented a first tariff restructuring in March 2021.|

A second-step AR is due in June (new June 1st, 2021 SB) and the Q4 FY2020 QTA in September

(new end-September 2021 SB). The Q1 FY2021 QTA falls in April 2021 and is expected to be timely implemented under the automaticity of the amended NEPRA Act.

Enacting the NEPRA Act amendments, committed to be adopted by parliament in March 2021 as prior action (PA) under the IMF program, the amendments will ensure the automaticity of quarterly tariff adjustments (QTAs) and reintroduce the option to levy surcharges if necessary.

Also the cross-subsidy reform will be finalized, which will underpin a better targeting of energy subsidies in the FY 2022 budget (amongst others through the introduction of more tariff slabs for large consumers) (new end-June 2021 SB).

Steps are being taken to advance reforms in the gas sector. In view of the sector’s high stock of arrears (amounting to about PRs199 billion at end-FY 2020, up from PRs144 billion at end-FY 2019), crucial measures to improve the sector’s performance are being taken.

Gas sales prices were revised upwards by September 2020 to fully reflect the projected annual revenue requirement of both Sui companies for FY2021 and a part of Sui Southern arrears.

The IMF staff assessed that the Fund program risks remain significant, both from domestic and external factors. Amid the unfolding second Covid-19 wave, uncertainty remains high around the domestic economic recovery, trade, and remittances. In addition, political tensions over reforms could weaken policy implementation, and undermine Pakistan’s adjustment and recovery path as well as debt sustainability.

Geopolitical tensions could increase oil prices and an adverse shift in investor sentiment affect external financing. Close program monitoring and financing assurances from key lenders mitigate those risks.

Based on the performance under the very challenging circumstances and commitments ahead, the IMF staff supports the authorities’ request for the completion of the second, third, fourth, and fifth reviews under the EFF. It also supports setting new quantitative targets for end-March, end-June, end-September, and end-December 2021; rephasing access consistent with the modified review schedule; making all funds available for budget support; and extending the approval for the retention of the current existing exchange restrictions and MCP, because they are temporary, non-discriminatory, and needed for balance of payments reasons.