The government will have to hike electricity tariff by 25pc in the next four months to curtail power sector losses. Influenced by the rupee depreciation and demand pressure, inflation has already widened to 8.2pc year-on-year in February. In the absence of a policy to expand the tax net and improve exports, prices of essentials are set to increase further in the next few months.
The government plans to increase power tariff to Rs16.24 per unit from the existing Rs12.98 per unit to bring power sector losses to zero from July 1, 2019. Recently, it cleared Rs200 billion of circular debt that had swelled to over Rs1.64 trillion to slightly improve cash flows of the energy sector including oil, gas and electricity companies. The largest chunk, Rs60b, flowed to the Pakistan State Oil (PSO), followed by Rs54b to the Independent Power Producers (IPPs) and Rs25b to the Pakistan LNG Ltd (PLL) for onward payments to fuel suppliers. The government plans to increase power tariff by Rs3.26 per unit to meet conditions, set by the International Monetary Fund (IMF) for a bailout package for Pakistan. The tariff adjustment of 25pc will be in addition to the monthly fuel price adjustments, which would result an increase of Rs1.9 per unit if gas is supplied at 850mmcfd for April, May and June 2019. The impact on the consumer will be an increase of average per unit price from Rs12.98 per unit to Rs13.85 per unit in March and then to Rs15.31 per unit in June.
Pakistan is expected to reach an agreement with the International Monetary Fund (IMF) on a potential bailout package worth $12 billion to support its economy, improve foreign exchange reserves and overcome a balance of payment crisis. “Early indications suggest that Pakistani authorities requested aid of $12 billion. We maintain that Pakistan and the IMF will reach an agreement over a bailout soon, with a potential bailout size of about $12 billion,” Fitch Solutions, an affiliate of the Fitch Ratings, said in its latest update on Pakistan’s economy. “We believe that the conditions and targets will focus on key areas such as fiscal consolidation and debt management, a review of monetary and exchange rate policy, financial and banking sector reforms, as well as the implementation of key structural reforms,” it added.
If negotiated, it will be the biggest IMF loan received by a Pakistani government. A 2013 package had improved Pakistan’s macroeconomic fundamentals over the three year time-frame before fiscal and monetary management started to slip again in late-2016 and 2017. “We would expect similar measures to be implemented in the event of a package being signed.” Fitch said measures to strengthen Pakistan’s fiscal and debt dynamics would likely be a major cornerstone of the IMF deal, with the end-goal of narrowing the budget deficit and stabilising the debt-to-GDP ratio through austerity measures. “The policies will likely be aimed at reducing the budget deficit from an estimated 6.6 per cent in 2018 to approximately 4-5 per cent, or even lower, over the next one-to-three years, with the budget 2018-19 (July-June) already targeting a deficit of 4.9 per cent. It would be roughly in line with the consolidation programme implemented in 2013 that set out expectations for a reduction in the fiscal deficit by an annualised one per cent per year for three years,” it added.
Pakistan’s public debt stands at 71.4 per cent of the GDP. The IMF previously targeted to lower the debt-to-GDP ratio from 63.9 per cent in 2013 to 60.5 per cent over a period of three years. However, it was not achieved and the ratio eventually rose to 67.6 per cent in 2016. Similar to the previous loan agreement, experts say the IMF will ask Pakistan to strengthen tax administration, broaden the tax base and raise its tax-to-GDP ratio. In addition, the reduction in public spending would likely involve further reductions to energy subsidies, as the target of reducing the subsidies to 0.4 per cent of the GDP under the previous package was not met given that subsidies still stood around 0.9 per cent in 2016. Moreover, there will also likely be a focus on reducing transfers to provinces so as to better align federal and provincial responsibilities in expenditure. Structural reforms will be another pillar of the IMF deal, similar to the reforms under the loan arrangement in 2013 and they will likely focus on the privatisation of loss-making public sector entities and measures to improve the local business scene.
The Pakistan Tehreek-i-Insaf (PTI) government has obtained $10 billion from countries including the UAE, Saudi Arabia and China to help stabilise foreign exchange, meet its current account deficit and support the rupee. Due to a persistent decline in foreign reserves, the rupee has depreciated approximately 30 per cent in the past year and Pakistan needs fresh funding to support the currency and foreign reserves.
Experts hope the biggest loan from the IMF will help stabilise the rupee. However, they warn an IMF loan will come at stringent terms and the Pakistan government would need to work hard for its servicing. A $12 billion loan in current circumstances is positive but there could a challenge for repayment in the coming months, as the government has no policy to expand its tax net and improve exports even after being in the power for over seven months. Also, inflation will increase due to a hike in gas and electric prices due to the loan deal. The government will have to come up with quick solutions and policies. It will have to control its costs and reduce expenditures in addition to managing funds in such a way that it must not opt for a loan again in the future.