FeaturedNationalVOLUME 18 ISSUE # 36

Striking a delicate balance between energy sector reforms and IMF conditions

The International Monetary Fund’s (IMF) financial assistance to Pakistan has come with strict conditions, leading to significant concerns among citizens and businesses after the recent approval of a substantial increase in the base power tariff. While the IMF argues that these measures are necessary to address Pakistan’s unsustainable power economics, there is apprehension about the potential collateral damage to the middle-class during an economic slowdown. As the government strives to meet IMF demands while safeguarding citizen welfare, finding a delicate balance between revenue generation and consumer burden becomes crucial for the nation’s economic growth and development.

The IMF’s financial aid to Pakistan came with stringent conditions, leading to the recent approval of a substantial increase in the base power tariff, up to Rs7.5 per unit, by the federal cabinet. While these measures may address the power sector’s financial needs, there is a serious concern about the collateral damage. Balancing the need for revenue with the potential burden on consumers becomes crucial for economic growth and development. The government faces a challenging task of meeting IMF demands while safeguarding the well-being of citizens.

To mitigate adverse effects, exempting lifeline consumers and protecting vulnerable segments from the tariff hike is a positive step. However, residential consumers and commercial users will bear the brunt of the increase, worsening their financial troubles. Small and medium-sized enterprises, vital for economic growth, may struggle to sustain operations, and households will face challenges coping with rising electricity bills during the summer heat. Moreover, these tariff hikes could lead to further inflationary pressures, affecting production costs, transportation, and living expenses.

Negotiations with the IMF have not been smooth, and while it is impossible to please all concerned parties, the government must prioritize and strike a delicate balance. Exploring alternative measures such as investing in energy efficiency, promoting renewable energy, and implementing conservation initiatives can help reduce the burden on consumers. Additionally, improving the financial health of power distribution companies and addressing the root causes of circular debt are also essential.

The IMF’s most recent Country Report on Pakistan has highlighted structural issues, particularly in the energy sector. The circular debt stock for power and gas sectors had reached a staggering Rs 5,000 billion or 6 percent of GDP by March 2023, while the tax-to-GDP ratio remained at a mere 10 percent of GDP. The circular debt flow overrun in the first nine months of FY2023 was estimated at Rs 387 billion, despite aggressive tariff revisions in July 2022. The Circular Debt Management Plan aimed at reducing untargeted and unbudgeted subsidies, but inefficiencies in the system remained a significant challenge.

The IMF and other multilateral agencies have emphasized revenue measures as key to energy sector reforms. However, addressing system inefficiencies, especially in the distribution sector, is equally crucial. Almost Rs 250 billion of the FY23 circular debt stock pertained to under-recovery in billing and distribution losses. Pakistan’s billing collection hovered around 90 percent, whereas the revenue requirement assumed 100 percent recovery. Tackling transmission and distribution inefficiencies is vital to address the circular debt menace effectively.

While Pakistan authorities have committed to not introducing unbudgeted subsidies for FY24 and implementing timely adjustments, simply passing on transmission and distribution inefficiencies to the end consumer may be counterproductive. Evidence suggests that T&D losses tend to increase and recoveries decrease when tariffs are substantially raised.

Pakistan’s national average tariff has nearly doubled from two years ago, currently standing at close to Rs35/unit. However, during a low economic growth cycle, creating incremental demand on the national grid becomes challenging. Increasing tariffs further may put additional pressure on demand. The capacity charge component of Power Purchase Price constitutes over 70 percent of the energy generation cost. To lessen the impact in unit terms, finding ways to broaden demand is essential.

Pakistan’s electricity usage per connection has stagnated for nearly 13 years due to a failure to explore more usage cases and abrupt tariff revisions. Taxes, surcharges, and duties to compensate for inefficiency now account for over one-third of the final price paid by consumers. Though the energy generation mix has improved, lopsided independent power producer contracts have led to high capacity charges, curtailed demand growth, and persistent T&D losses and low billing collection.

The IMF’s approach, heavily relying on revenue measures disguised as sector reforms, has not proven entirely effective. Other countries, like Bangladesh, have significantly reduced their T&D losses in the last ten years through substantial investments in distribution system overhaul.

It is high time that the authorities acknowledge the magnitude of the problem and take decisive action. A comprehensive action plan for Pakistan’s energy sector was laid out by the Energy Experts Group in 2009 but has not received the attention it deserves. Reforms must go beyond merely increasing power tariffs.

With or without the IMF’s involvement, Pakistan needs to embark on genuine reforms to address its energy sector challenges. The core of the problem remains the same, and it is time for concrete actions to be taken to resolve these issues effectively.

Pakistan’s energy sector has long grappled with structural issues, most notably the staggering circular debt and transmission and distribution inefficiencies. Despite the IMF’s emphasis on revenue measures, true reforms must address the root causes of these problems. Simply passing on inefficiencies to consumers through tariff hikes may prove counterproductive. Instead, the government should explore alternative solutions, such as investing in energy efficiency, promoting renewable energy, and implementing conservation initiatives. By prioritizing citizen welfare while tackling the energy sector’s financial needs, Pakistan can pave the way for sustainable and balanced economic growth, both during and beyond the IMF’s financial assistance.