The IMF is grilling Pakistan at the rate of power

The IMF is grilling Pakistan at the rate of power

As consumers brace for three major power shocks in July, the International Monetary Fund (IMF) has advised Pakistan to finalize its next power tariff hike based on further depreciation of the rupee rather than assuming a stable current value of the local currency.

The IMF’s ‘advice’ could add to the woes of electricity consumers as the government is working on increasing electricity rates up to Rs7 per unit next year based on a stable exchange rate, according to energy ministry sources.

The IMF raised the issue of devaluation during a meeting with the National Electricity Regulatory Authority (NEPRA), the source said.

They noted that the IMF also questioned the incorrect electricity consumption assumptions used for the current fiscal year’s annual power tariff adjustment. The higher consumption estimates, later proven wrong, led to large increases in electricity bills due to monthly and quarterly tariff adjustments.

The source said the Pakistani authorities informed that the upcoming increase in electricity prices will burden consumers due to multiple increases due to monthly fuel adjustments, quarterly adjustments, and large annual base tariff hikes to come.

Pakistan has informed the IMF that electricity prices may skyrocket in July due to simultaneous adjustments due to monthly, quarterly and annual tariff hikes.

NEPRA has also scheduled a hearing next Thursday to determine the annual base tariff adjustment. The IMF team is in the city until May 23 to gauge the government’s readiness to take decisive action and approve the next budget before presenting it to the federal cabinet and Parliament.

Domestic consumers are already paying up to Rs62 per unit for electricity, contributing significantly to suppressed demand and shifting to alternative energy sources.

The source said the Ministry of Energy is facing difficult questions regarding the incorrect and unrealistic estimates of electricity consumption this fiscal year. During these discussions it was also revealed that NEPRA does not have any internal capacity to make assumptions and has to rely on whatever the Ministry of Energy shares with it.

It has assumed a 7% increase in electricity consumption for this fiscal year, which is actually down from the previous year. The miscalculation led to a lower annual base tariff increase in July last year but led to higher price increases due to monthly and quarterly adjustments, the source said. The source said Pakistani authorities admitted before the IMF that the demand growth assumption of 7% was unrealistic. They assured that for next year, demand will be projected around 3% to avoid higher than expected price increases during the fiscal year.

The source said the IMF sees consumers as ‘worse off’ due to incorrect estimates by the Ministry of Energy.

The issue of exchange rates applicable to labor prices also came up during the Pakistan-IMF meeting. The IMF advised Pakistan to consider the average depreciation in the value of the rupee to determine next year’s annual base tariff instead of reflecting a stable value.

The IMF assumes the rupee will devalue to Rs329 to a dollar or 18% by June next year. It is not clear what value of the rupee is proposed to determine the next base price increase.

The IMF also wanted to know about the lag in communicating the impact of electricity price increases due to quarterly adjustments.

The source said due to incorrect estimates coupled with systemic inefficiencies, the circular debt may end up at least at Rs2.450 trillion, against the target of Rs2.310 trillion. They said Pakistani authorities admitted before the IMF that the circular debt reduction target would be missed by a margin of Rs138 billion.

However, they assured that efforts will be made to recover Rs20 billion from quarterly adjustments in this fiscal year to keep the circular debt around Rs2.430 trillion. Missing the circular debt reduction target is a serious issue that highlights the mismanagement of the energy ministry.

The source said NEPRA will provide the IMF with realistic total electricity demand and exchange rates, which will be used to calculate the electricity price hike.

Energy and taxation emerged as two topics of discussion during the IMF talks a week ago. However, it seems neither the IMF nor the government have learned their lesson and will repeat the same mistakes in the form of taxes and rising electricity prices.

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