Pakistan drafts plan to reduce power sector circular debt

Meets IMF’s key condition which also calls for higher tariff and withdrawal of subsidies

ISLAMABAD/LAHORE (Dunya News/Web Desk) – As Pakistan’s power sector faces a serious crisis amid the rising cost of generation, higher tariffs and line losses, the government has prepared a plan to reduce the circular debt – thus meeting a major IMF (International Monetary Fund) demand.

The global lender has made introduction of reforms, reduction in circular and increase in electricity prices part of the stringent conditions set for the $3billion deal approved for the cash-starved country.

Sources say the plan envisages Rs182 billion reduction in the power sector’s circular debt, which stood at Rs2,310bn on June 30, during the current fiscal year, meaning the total will drop to Rs2,128bn.

Out of this total, the government needs to pay Rs1,430 to the power producers – gencos (power generation companies). At the same time, the Power Holding Company’s arrears have jumped to Rs760bn with gencos required to pay Rs110bn to the fuel suppliers [oil marketing companies (OMCs)].

According to the sources, the finance and energy ministries have drafted the plan. However, one would have to see how the IMF would react to this given the negligible cut in the overall size of circular debt.

THE CONDITIONS

Power sector has been specifically mentioned by the IMF, which called for a "timely" rebasing of tariffs to ensure that costs are recovered. This means hiking prices for consumers despite already record high inflation in what is an election year.

Read more: What Pakistan needs to do under the IMF programme

And the government has already hiked the base tariff while also going for a substantial increase in price, as the world ‘s top lender also called for “steadfast policy implementation" and "fiscal discipline" to overcome its current challenges, which include record high inflation, a gaping fiscal deficit and building up low reserves.

That’s why IMF Managing Director Kristalina Georgieva stressed the need for reducing state expenditure and bringing changes in the energy sector through steps like increase in tariff while modifying the subsidy structure.

“Maintaining discipline over non-critical primary expenditure will be essential to support budget execution within the envisaged envelope. In parallel, the authorities urgently need to strengthen energy sector viability by aligning tariffs with costs, reforming the sectors cost base, and better-targeting power subsidies."

It doesn’t stop there as even the Asian Development Bank (ADB) said Pakistan needed to introduce reforms as suggested by the IMF.