The International Monetary Fund (IMF) has declined Pakistan’s proposals aimed at addressing the energy sector’s Rs1.3 trillion circular debt and reducing electricity prices for industries. Nathan Porter, IMF’s Mission Chief to Pakistan, expressed skepticism about the proposals, stating that they would burden residential consumers and pose fiscal risks.
Porter emphasized that the proposed industrial tariff reduction plan fails to tackle underlying issues, questioning its effectiveness in achieving circular debt neutrality. He cautioned that such a plan would significantly burden vulnerable households.
The interim government’s proposal aimed to reduce the cross-subsidy burden on the industrial sector by 91%, amounting to Rs222 billion, while increasing the subsidy burden on residential consumers by 41%, or Rs22 billion. Additionally, the proposal suggested imposing fixed charges ranging from Rs50 to Rs3,000 per month on all residential consumers, further straining their financial situation.
Despite the government’s hopes to settle a significant portion of the circular debt, the IMF’s disapproval casts doubt on the feasibility of the proposed solutions. Porter stressed the importance of broad-based reforms, including reducing energy costs, improving compliance, tackling theft and line losses, and addressing governance issues within distribution companies.
The IMF also expressed concerns about the circular debt reduction plan, which aimed to decrease debt by 22%, or Rs1.27 trillion, using Rs902 billion in supplementary grants. Porter highlighted fiscal risks associated with the plan and the continued reliance on supplementary grants, which have strained fiscal accounts in recent years.
While rejecting the current proposals, the IMF remains open to collaborating with the government and other international partners to develop sustainable reform plans. Successful implementation of such plans could lead to lower tariffs for all consumer classes.
Pakistan’s circular debt stood at Rs5.72 trillion as of November last year. The government’s proposed plan aimed to reduce gas sector debt by Rs1 trillion and power sector debt by Rs255 billion, utilizing the budget and dividends from government-owned gas exploration and production companies.
Despite the government’s assurance of a seamless process, the IMF remains cautious, emphasizing the need for prudent fiscal management and sustainable reforms in the energy sector.
