IMF Proposes Electricity Tariff Reforms in Pakistan

In its August 2015 review of Pakistan’s economy, the International Monetary Fund (IMF) proposed a wide-ranging package of reforms for the country’s energy sector and electricity sector in particular. This Call for Electricity Tariff Reforms in Pakistan by the IMF presents a set of prescriptions for tackling the recurring problems of circular debt and achieving financial sustainability in the electricity sector. Let’s review the key recommendations of this report and the potential impact.

Circular Debt: A Hurdle in Pakistan’s Energy Sector

Another powerful barrier to progress within the energy sector is circular debt: the accumulation of payments owed by one leg of the sector to another, creating a deadly loop in which delayed payments of power generation companies by distribution companies cause a liquidity problem, rendering them unable to pay fuel suppliers and service loans, setting off a delay domino effect in the entire energy sector and discouraging investment. The most important IMF demand in this regard is to cap it at Rs2.3 trillion.

IMF Recommends Restructuring Tariffs and Subsidies

One of the IMF recommendations to make the energy sector financially viable is to end some subsidies to the sector. Out of a total of Rs976 billion approved for subsidies, it recommends that Rs249 billion is discontinued to allow the government to differentiate rates according to electrical consumption. In other words, end subsidies that people who consume more energy (because they have the income to) get. Another Rs255 billion in subsidies for production residues (or inefficiencies) related to electricity production, should be gradually eliminated too. Rs125 billion in extra-payments due to lack of financial discipline by entities in the sector will end too.

Digitization: A Tool for Curbing Circular Debt

The IMF agrees. Better digitisation can help stop circular debt. If Pakistan can make the system more digital – for billing, metering and reducing instances of electricity theft – the arteries of the system will be healthier and easier to control. There will be better oversight and regulation. If the electricity regulator and provincial authorities can meet the IMF’s proposed Rs2.3 trillion cap on circular debt, this is the way forward.

The Road Ahead: Challenges and Opportunities

While the IMF recommendations are necessary for the long-term stability of the energy sector, they are also a complex undertaking, which may increase electricity tariffs for consumers, and may require additional robust social safety nets to mitigate the effects of costlier energy on poorer segments of the population. But if these reforms can be implemented effectively, including the IMF’s Call for Electricity Tariff Reforms in Pakistan, then further power grid and renewable energy investments will follow. The future of power in Pakistan, by virtue of the amounts invested, is shifting profoundly away from the failed business model of the Pakistan Peoples Party and will benefit all its stakeholders. And it will ultimately benefit us all by making power in Pakistan more sustainable – and reliable.