The government’s decision to provide electricity to five export-oriented sectors at Rs 19.99/ kWh for the remaining three quarters of the current fiscal year (2022-23), may become a stumbling block in ninth review of International Monetary Fund (IMF).
This was the crux of background interaction with some government officials who are extensively dealing with the issue of five zero rated sectors.
Their view was strengthened after Jihad Azour, Director, Middle East and Central Asia Department IMF, stated during a press conference on 13th October that subsidies targeted to support certain items have proved regressive and is “not the best way to use the very limited fiscal space that exists. Therefore, we are encouraging Pakistan…to move from an untargeted subsidy that is a waste of resources and to dedicate those resources to those who need it.”
The government budgeted Rs 20 billion to provide subsidized electricity to five export oriented sectors, i.e., textile, leather, carpets, surgical and sports during the year, of which actual claims of August alone were Rs 15.160 billion which left a meagre Rs 4.840 billion for the rest of the fiscal year. The projection for September (anticipated claims) is Rs 12.053 billion.
For the entire financial year, Power Division would require Rs77.957 billion additional budgetary allocations as supplementary grant for provision of concessional tariff to export oriented industries. The Power Division stated that the package will be notified for billing once the subject supplementary of Rs84.164 billion is approved/ released to the Power Division. In addition, the Power Division requires an additional allocation of Rs6.207 billion as supplementary grant for clearing previous year’s liability.
Supply of power to 5 export-oriented sectors: Govt to arrange Rs100bn from FY23 budget
Finance Division, in its comments on the summary stated there was an understanding with the IMF to stay within the allocated budget and the proposed rates of electricity at 9 cents per kWh and of RLNG at $9 has to be seen in the context of budgetary allocations.
Finance Division further stated that in case of any additional funding requirements, the matter will have to be discussed with the IMF, in consultation with Ministry of Energy, as and when required.
The then Finance Minister Dr Miftah Ismail who opposed continuation of concessional tariff to five zero rated sectors after September 2022 was forced to bow down before the pressure of Prime Minister, after which the cabinet approved continuation of concessional tariff. However, later on, Finance Division, succeeded in undoing the Cabinet decision through a summary to the Prime Minister, which was not shared either with Commerce Ministry or Power Division.
As this decision appeared on the Finance Division’s summary (carried in Business Recorder) and Power Division notified discontinuation of the concessional tariff from October 1, 2022, textile sector cried foul that this reversal would make its output regionally uncompetitive and sought the restoration of the tariff subsidy.
They also approached Prime Minister, who directed the newly appointed Finance Minister to sit with five zero rated sectors and resolve their issues. Subsequently, a meeting was held between the representatives of zero rated sectors and government’s team comprising Finance Minister, Commerce Minister and Power Minister wherein it was decided that the government would ensure supply of electricity to five zero rated sectors at Rs 19.99/ kWh for the remaining period of current fiscal year.
According to former Finance Minister Dr. Miftah Ismail, federal government is to either cut its expenditure or increase revenue to ‘appease’ the already incentivized five zero-rated sectors by supplying electricity at 9 Cents per unit throughout the financial year 2022-23, which requires additional subsidy of between Rs80 to 100 billion.
The officials in Finance Ministry when asked did not have any clue as to where fiscal space will be created to implement the understanding reached between the government and five zero rated sectors and at a time when the country is on an IMF Program.
They also fear that the government’s decision to continue supply of electricity to five zero rated sectors at subsidized rates may become a stumbling for the success of the ninth review of IMF. However, the situation will become clear after the finance minister returns from Washington.
