IMF program leaves government with little to no room on electricity prices

August 30, 2023 (MLN): The government's capacity to address the escalating electricity prices, which have prompted public demonstrations, is somewhat restricted due to the International Monetary Fund (IMF) program. However, efforts are being made to provide relief while complying with the program's guidelines, Muhammad Ali, the caretaker Federal Minister for Energy and Power said during a TV program on Tuesday.

Muhammad Ali delved into the multifaceted factors influencing electricity bills, while also addressing the formidable challenges the energy sector is grappling with.

He pointed out that the fluctuating US dollar and interest rates play a pivotal role in determining electricity prices.

While highlighting the surging prices in recent month, he stated that the adjustments of the exchange rate that should have taken place on July 01 were delayed, leading to a two-month adjustment included in August's bill, impacting consumers' pockets.

When asked about the possibility of further electricity price increases, Muhammad Ali noted that fluctuations in the US dollar and interest rates would inevitably lead to adjustments in prices.

These factors are beyond the government's control, contributing to the uncertainty surrounding future price hikes.

Muhammad Ali mentioned that getting rid of the circular debt is a priority, but it will take time to solve all the problems.

He expressed that the circular debt issue needs to be addressed in conjunction with the banking, gas, and power sectors.

The solution lies in issuing a long-term instrument that removes the burden from the power sector, effectively eliminating the annual interest payments.

However, it is essential to understand that merely resolving the circular debt will not suffice, comprehensive reforms are imperative.

Privatization and subsidies can be utilized as tools in this endeavor.

It is important to acknowledge that this will not be an overnight transformation.

He emphasized that reforms are necessary for lasting changes, citing the persistent challenges faced by the power sector, including annual losses.

The sector carries an accumulated debt of Rs2.5 trillion, with interest payments amounting to Rs400-500 billion.

These financial burdens have a direct impact on tariff rates, adding an additional 3-4 rupees per unit.

Coupled with Pakistan's low tax-to-GDP ratio, with an impact of 7-8 rupees per unit on tariff rates, these challenges underscore the complexity of managing the power sector.

It is important to mention that 85% of the total bill comprises taxes, register duty surcharges, and other levies, while the remaining portion goes towards actual payment for electricity usage.

A striking revelation is that a consumer who pays a bill of Rs10,000 is actually contributing only around Rs1,200 towards the cost of electricity consumed.

Breaking down a Rs10,000 electricity bill, Rs3,100 is paid as taxes as capacity payment, Rs1,300 as cross-subsidy, Rs1,300 as electricity distribution

Meanwhile, government employees are estimated to consume free electricity amounting to a staggering Rs11.25 billion annually. This figure underscores the substantial financial burden on the government's resources, which could be channeled into other vital sectors.

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