International Monetary Fund (IMF) discussed progress in energy sector reforms, circular debt and power tariff fixation mechanism along with other issues which are part of the program.
There are indications that the Fund is urging the government to further adjust tariff to achieve full cost recovery for at least five power Distribution Companies (Discos).
The demand of further adjustment from the Fund is at a time when the export-oriented industry is making a hue and cry on the imposition of financial cost surcharge, taxes, fixed charges, surcharges and positive fuel adjustment.
Technical team of IMF informed that IMF was unhappy with the performance of energy sector as many commitments have not been met.
They further informed that in the “defunct” Pakistan Electric Power Company (Pepco) energy sector circular debt was hovering at over Rs 1.9 trillion by December 31, 2019 of which Rs 1.1 trillion is circular debt whereas Rs 850 is parked in Power Holding Private Limited (PHPL).
Of this amount about Rs 600 billion has been added by the PTI government of which Rs 500 billion is sourced to inefficiencies of Discos in terms of poor recovery from consumers. Power Division through an advertisement in the print media has sought quotations from Islamic banks for Sukuk of Rs 200 billion to retire a part of the circular debt through competitive bidding.
The Power Division had to upload circular debt retirement plan on its website by January 31, 2020 as per commitment with the IMF but this condition has not yet been implemented. The circular debt is expected to be over 5 per cent of GDP by end December 2019. Over the years, circular debt has stripped the sector of working capital, constraining investment and capacity utilization, leading to unreliable supply that hinders economic growth.
Circular debt refers to the cash flow shortfall incurred in the power sector from non-payment of obligations by consumers, distribution companies, and the government.
The plan, prepared in consultation with international partners and IMF staff, aims to reduce the annual flow of circular debt from the current level to around Rs 50-75 billion by FY 2023 through improving collection and reducing losses, streamlining tariff updates, and rationalizing subsidies.
The government also had to submit to parliament amendments to Nepra Act to ensure full automatically of the quarterly tariff adjustments and eliminate end-December 2019 the gap between the regular annual tariff determination and notification by the government this too remains unmet.