Power Rates Increased Under IMF Agreement

CENSORED

By Khaleeq Kiani

ISLAMABAD, Dec 26: Under an agreement with the International Monetary Fund, the government on Friday increased power tariff by imposing 60 paisa per unit ‘equalization surcharge’ – third in as many months – on electricity rates for all distribution companies (except K-Electric) with immediate effect.

As a consequence, the existing notified tariff at Rs11.82 per unit has been increased to Rs12.43 per unit. In addition, this will have a further impact of 10 paisa per unit when charged to consumers with general sales tax.

“The federal government is pleased to notify the equalization surcharge at the rate of Rs0.60/KWh, applicable to all the consumer categories except lifeline consumers on per unit consumption in respect of ex-Wapda Distribution Companies”, said an official notification not made public.

On October 3, the government had imposed an equalization surcharge of 30 paisa per unit, followed by Rs1.50 per unit on November 3 to cover interest payments to Independent Power Producers for delayed payment by the government or its power companies.

The National Electric Power Regulatory Authority (Nepra) had been rejecting the government request for inclusion of these costs and system losses into the power tariff. Therefore, the government decided to impose surcharges under IMF compulsion.

The latest notification said the “ex-Wapda Disco shall deposit the amount of this surcharge in a Fund called the ‘Universal Obligation Fund’ to be kept in Escrow Account maintained at Central Power Purchasing Agency (CPPA) for exclusive use for discharging the liabilities of power producers”.

“The surcharge paid under this notification shall be considered as a cost incurred by a distribution company to be included in the tariff of that company as determined by National Electric Power Regulatory Authority and notified by Federal Government in the Official Gazette”, the notification went on.

Under a written agreement with the IMF early this month, finance minister had committed “to continue to use the downward trend to make further adjustments in the surcharge to close any gap (about 5 per cent) to stay within the FY2014-15 budgeted electricity subsidy of 0.7 per cent of GDP”.

As promised, the government took benefit of fuel price reduction of Rs2.97 per unit approved by the Nepra on December 19, for one month to be passed to consumers in billing month of January 2015.

Interestingly, the Nepra-approved reduction in fuel cost would automatically come to an end after one month but the equalization surcharge would remain part of the base tariff for all times to come unless power system losses were brought down to less than 10 per cent from about 19 per cent at present.

When contacted, a power ministry spokesperson declined to respond to specific questions but tried to cover it up with a vague written version. The spokesperson sadi the “NEPRA authorities have determined and notified Fuel Adjustment Charges of Rs.2.9672/unit out of which Rs2.3672/unit will be passed on to all the consumers. An amount of Re. 0.60/unit was required to pay for the power sector finances and notified as surcharge separately. The net effect to end-consumer is no increase in the rates and net reduction of Rs2.3672/unit."

On November 3 when it was holding talks with the IMF, the government had imposed another equalisation surcharge at an average rate of Rs1.5 per unit on consumers of all electricity distribution companies with retrospective effect from October 1 that would remain in force until December 31, 2015 to enable revival of $6.78 billion bailout package suspended in August.

Withdrawal of power and gas subsidies is one of the key themes of the IMF package.

Exactly a month ago on October 3, the government had imposed a 30 paisa per unit surcharge on electricity consumers.

Under the Nepra law, the government should have reduced consumer tariff by Rs1.5 per unit in April this year but it has been delaying passing on the benefit to consumers.

Nepra had completed the tariff determination process for nine Discos in February and March this year based on revenue requirements and efficiency standards for the 2013-14 financial year by reducing prevailing tariff by Rs1.5 per unit.

A ministry official said the government and its Discos had been fighting a legal battle for almost eight months to prevail upon Nepra to provide relief to distribution companies, but had to exercise its “sovereign powers to impose surcharges” on refusal by the regulator to entertain requests for lenient efficiency standards. (Ends)

Khaleeq Kiani

IMF tranche and fiscal squeeze
By Khaleeq Kiani
Monday, 03 May, 2010 | 03:07 AM PST |
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After a lot of squabbling, Pakistan now hopes to get the much-delayed $1.2 billion tranche from the IMF after its approval by the Fund’s executive board on May 14 in Washington.

Before the expected approval of the funds, Pakistan authorities under the fourth review need to draw a roadmap with the World Bank and the Asian Development Bank to eliminate electricity subsidies by August 2010.

This instalment was to be released after the completion of Dubai talks on February 15 but was delayed due to disagreement between the IMF and authorities on the observance of performance criteria. As a result, the country’s foreign exchange reserves slipped below $15 billion after many months.

The $11.3 billion IMF programme under the Standby Arrangement (SBA) is fully financed but Pakistan also needs crucial disbursements of external assistance, largely from the ADB, the World Bank and Friends of Democratic Pakistan.

The authorities and the IMF agree that the stabilisation programme has progressed well, with economic recovery under way and external sector position improving despite challenging circumstances. However, the fiscal deficit targets remained out of control in each of the first three quarters ending March 31.

Pakistan has sought at least two waivers from the IMF for slippages in important macroeconomic targets and requested modifications in future programme milestones. “We request waivers for non-observance for the end-March quantitative performance criteria on the overall budget deficit (excluding grants) and net government borrowing from the State Bank,” according to letter of intent (LoI) sent to the IMF board.

The government missed the adjusted end-March quantitative performance criteria on the fiscal deficit by 0.4 per cent of GDP on account of lower revenue and security-related expenditure and shortfalls in disbursement of IDP grants and pledges made at Tokyo. The government also missed the end-March quantitative performance criteria on net government borrowing from the central bank by 0.2 per cent of GDP due to delay in the disbursement of external financing.

The LoI said: “We also request (i) a modification of the end-June 2010 performance criteria for the budget deficit to increase the cumulative end-quarter ceilings by Rs22 billion (0.15 per cent of GDP) in order to allow space for urgent security outlays and avoid undue cuts in other priority spending, and (ii) a modification of the end-June 2010 performance criterion (raising the floor) for net foreign assets of the SBP by $300 million, taking into account our strengthened external position.”

The two sides agreed that reaching agreement on the 2010-11 budget and further progress on the July 1 introduction of VAT would be key issues for the fifth review. So far, Pakistan has received $6.4 billion under the IMF programme.

Pakistan authorities and the IMF staff agree that the stabilisation programme faced challenges because of slower than planned electricity reforms, delays in disbursements of pledged lenders’ support, revenue shortfalls and military operations, complicating the fiscal management.

Inflation has also picked up beyond target. The upward revised fiscal gap from 4.9 per cent to 5.1 per cent is to be met through higher than projected privatisation inflows which would more than compensate for foreign inflows because tax and non-tax revenues might be lower than targeted. The growth rate is anticipated to remain at around three or 3.3 per cent because the large-scale manufacturing has started to pick up after a protracted decline. Agriculture performance is mixed, with lower rice and sugarcane output, offset by a stable outlook for wheat and higher cotton output. Private sector credit growth has improved somewhat as businesses rebuild their working capital and financial and capital markets remain positive.

However, the growth outlook is subject to risk due to domestic security situation, erratic power supply and the current pace of global economic recovery. These factors would push annual consumer index up at 12 per cent. The current account deficit is expected to improve further to 3.75 per cent of GDP supported by lower imports despite higher oil prices, lower profit outflows and strong remittance inflows.

The government has assured the IMF that the integrated value added tax acts as introduced in the federal and provincial assemblies will be maintained. The integrated VAT regime will be implemented to avoid the problem of cascading and tax competition. The review of VAT law by the provincial and federal legislative committees would be completed by mid-May and it would be passed assemblies by May 31.

As preparatory step towards full implementation of VAT Act by July 1, 2010, the VAT regulations and zero rating would be issued 2-3 weeks after its enactment. A review of business processes, record keeping and design of forms will be integral component of the VAT regulations.

The government has also given an undertaking to the IMF to complete the transition to a single treasury account by June 2010. The government said it was collecting information on commercial bank deposits of federal entities and would have all non-own sources, non-security related cash balances transferred to the federal consolidated fund by the end of June and associated accounts closed.

“We will ensure that these transfers do not affect liquidity of the banking system. We will ensure that a minimum interest rate is received on all federal government deposits,” the S-MEFP said.

Privately, the authorities agree that the FBR would not be able to collect more than Rs1,350 billion by end of this fiscal year. The current year’s revenue target has already been slashed to Rs1,380 billion from Rs1,396 billion after partially taking into account a shortfall of 0.2 per cent of GDP in the first half of the fiscal year. The collection in the third quarter was short of target by over Rs25 billion.

The government has committed to redoubling its efforts to reduce the number of non-filers and under-reporting taxpayers. The FBR has sent around 200,000 letters to non-filers and under-reporters, resulting in additional 121,000 taxpayers filing their returns before the extended deadline of January 25, 2010.

The FBR would also focus on collection of tax arrears stuck with oil and insurance sectors. Banking and insurance sectors are being forced to pay their outstanding withholding taxes which have not been deposited through reconciliation of accounts.

About 900 companies and associations of persons have been identified for audit and 468 of them have been outsourced to the Institute of Chartered Accountants of Pakistan, along with auditing framework. Most of the audits are expected to be completed by June this year. The remaining will be conducted by the FBR and completed by the end of May.

Likewise, a comprehensive plan for nationwide rollout of poverty-scoreboard based targeting for the Benazir Income Support Programme (BISP) has been prepared with the help of the World Bank and the process for contracting firms will be completed by end-May. Delays in the rollout of the poverty scorecard system will slow delivery of BISP assistance and result in disbursement of about Rs50 billion, providing a saving of about Rs20 billion during the current year.