IMF, WB step up pressure for hike in power tariff

ISLAMABAD: The two international financial institutions (IFIs), IMF and World Bank, have stepped up their pressure on the government to jack up the power tariff at the very outset of the next calendar year 2022. And the World Bank in recent interaction with top notches of the Energy Ministry has linked its $1 billion credit loan for energy projects with an increase in power tariff from January 1, 2022.

“And we, the authorities in Pakistan, have started guessing that the IMF will not extend its new installment unless and until the government increases the power tariff by Rs2.5-Rs3 per unit in one go or staggers it within the current financial year till June 30, 2022,” a senior official of the Energy Ministry, who was part of the meeting with the World Bank mission held in Islamabad on August 4, 2021, told The News.

“The IMF program of $6 billion is right now under suspension and there are clear indications that the Fund wants not less than the increase in power tariff from January 2022, which is one of the prerequisites to restore the program,” the official said.

In an interaction with the World Bank mission headed by its vice president for South Asia Hartwig Schfer on August 4, 2021, the Bank’s side kept on insisting in the whole discussion as to whether the government will increase the power tariff or not from January or February, 2022. The Pakistan side was headed by Energy Minister Hammad Azhar while SAPM on Power and Petroleum Tabish Gauhar was also part of talks apart from secretaries of both power and petroleum divisions.

However, the World Bank mission was told, the official said, that the prime minister was very sensitive to this issue and he was the final authority to take a decision on it. “The bank’s officials were also told that the finance ministry was also the decision making forum to recommend to the PM for a hike in tariff,” the official sources said.

In the current year, the prime minister didn’t allow the tariff to be increased as he was of the view that it would increase the financial miseries of the masses and would cause a political backlash for his government. But under the latest scenario, both the IFIs have stressed on the government to increase the required power tariff or there will be no restoration of the IMF program and no credit line of $1 billion from the World Bank for energy sector projects.

The Pakistan side briefed the World Bank about its successes in scaling down the monthly flow in the circular debt in power sector and gave the commitment that the new leadership at the Energy Ministry will continue to ensure further reduction in the monthly flow but didn’t promise with the World Bank side about the increase. The energy minister told the delegation that due to effective measures by the government, the growth in circular debt was being curtailed to a considerable amount and during FY21, around Rs130 bn was added to the circular debt, which was some Rs408 bn lower than in FY20.

The official also argued that the Power Division has never been allocated the subsidy on actual basis to rein in the circular debt. This time for the current fiscal 2021-22, the finance ministry has allocated Rs330 billion against its demand of Rs501 billion. The timely release of the subsidy to this effect has also been a nail-biting problem for the Power Division. For the next two years, the government has set the target to reduce the T&D losses by 2.5 percent and improve the recovery by 5 percent.

However, the Pakistani side this time didn’t commit that that they will reduce the monthly flow in circular debt to zero at some point in time in the remaining two years of the incumbent regime. Earlier, the energy ministry leadership comprising the-then energy minister Omar Ayub Khan and the-then SAPM Nadeem Babar used to claim they would bring down the monthly flow in circular debt to zero by December 2020.

Earlier, the tariff was to be increased by Rs4.50 per unit, including the monthly, quarterly, annual adjustments with rebasing of tariff at Rs3.34 per unit. Out of the rebased tariff, the government passed the increase of Rs1.95 per unit on to consumers. The remaining part of the rebased tariff of Rs1.39 is yet to be passed on, but the government in the ongoing calendar year didn’t increase it as the chief executive of the country didn’t allow the authorities to increase the tariff. However, in the month of September, only 8 paisas will be increased in tariff. The World Bank told the government that it is left with no option but to hike the tariff by Rs2.50-3 per unit in one go or in staggered form before the start of the next financial year.

The official privy to the meeting with the World bank delegation said that the Energy Ministry was working on revised Circular Debt Management Plan and briefed the visiting mission that as an integral part of the revised plan, the government wants to restructure or re-profile the next five-year debt service payments for power projects that were installed under 2015 Power Policy, including CPEC projects. In case the interest payment tenure is increased from 10 to 15 years, then Pakistan will have to repay the amount in principle with interest up to $5 billion instead of $7.3 billion. And if it happens, then the tariff will tumble by Rs 2 per unit. The World Bank was also told that the government also wants to re-profile the debt servicing payments of Public Sector Power Plants i.e. Nuclear, Hydro, RLNG, GENCOs. The EAD gets the loan at 2 percent from lenders and it relends to the public sector organizations the loans at 12-15 percent. If the finance ministry agrees to re-lend the loan at 2 percent, then there will be a saving of Rs1,400 billion, which can be translated into reduction of Rs1 per unit. However, the finance ministry is not willing to provide solace to the public sector entities in this regard as relending the loan at 12-15 percent to public sector entities is the major source of non-tax revenue of the Finance Division.

The government side also mentioned to the World Bank that the government also wants to convert the power plants being run on imported coal to local coal. The already commissioned and under-construction 5,500MW imported coal-based IPPs (and Jamshoro-I) are to be converted to local coal from the existing Thar Blocks 1 & 2. The potential consumer tariff savings through economies of scale can be harnessed with the target of delivering the local coal at $30 per ton vis- a vis $50-60 per ton availability of imported coal to power houses.

The World Bank side responded: “We heard you and you heard us but our demand is to increase the tariff from January 2022.”