MUSHTAQ GHUMMAN
ISLAMABAD: The government has decided to increase electricity and gas tariffs by limiting subsidies only for marginalized segments of society, backward areas of the country and export-oriented industry as the situation is getting critical well-informed sources told Business Recorder. The decision was taken at a cabinet meeting held on November 10, 2020, with Prime Minister Imran Khan in the chair.
"Subsides and grants are now close to Rs. 4 trillion that were almost equal to total tax revenues. This situation is untenable as only further borrowing could sustain this level of subsidies," the sources quoted the Prime Minister as saying. The government is already in talks with the IMF on increase in electricity and gas tariffs.
Highlighting the distortions in power sector subsidies, the Cabinet was informed that top 25% consumers enjoyed 36% of the total subsidy whereas the bottom 20% consumers utilized a mere 10%. Furthermore, the practice internationally in vogue is that domestic consumers cross-subsidize the industry to make it competitive, however, in Pakistan it is the other way around. Therefore, in order to target the most deserving, linkage with Ehsaas Programme was being developed.
Some of the members were wary of the impact of sudden withdrawal of power and gas subsidies, as it would place an unbearable burden on the middle income groups. It was suggested that reduction should be done in a phased-wise manner, the Cabinet was informed that impact analysis of withdrawal of power sector subsidies on various socio-economic groups was being conducted.
Special Assistant to the Prime Minister, Dr. Waqar Masood, in his presentation on subsidies and grants informed the Cabinet that fiscal deficit as percentage of GDP had been oscillating between 5% and 9% since 2008, which is not sustainable. Gross Revenue had been sclerotic since 2008, ranging between 12% and 14% of GDP.
Provincial transfers as % of gross revenue have been on the rise since 2010. Net revenues minus interest and budget had been mostly in the negative since 2010. Revenue and expenditure was widening, which portends an explosive situation.
The volume of earmarked subsidies for FY 21 was Rs 209 billion of which Rs 135 billion was for electricity, followed by gas- Rs 10 billion, food- Rs 16 billion, fertilizer- Rs 6 billion and others-37 billion including Naya Pakistan housing subsidy.
According to SAPM on Revenue, for FY 21, the grants of Rs 40 billion were earmarked for Pakistan Railways whereas cash transfers were of Rs 208 billion, contingent& miscellaneous were of Rs 416 billion, others of Rs 217 billion, PSDP Railways- Rs 24 billion and Civil Administration Grant in aid of Rs 69 billion, including HEC, totaling Rs 974 billion.
According to him, circular debt was of Rs 2.2 trillion as on June 30, 2020 while future contingent liabilities forth-coming capacity payments of Rs 1.2 billion. Subsidies outside budget for gas circular debt was Rs 300 million. Subsidies outside budget - food and Fertilizer, stood at Rs 857 billion as of June 30, 2020.
Implicit subsidies: loans - cash development loans were Rs 1.6 trillion with effective Rate of Return 4.2 per cent, 10 year PIB rate- 9.5 per cent- estimated subsidy Rs 85 billion.
Implicit subsidies : Guarantees to loss-making PSEs (PIA, PHPL), PSM - Rs 1.6 trillion, total guarantees - Rs 2.3 trillion, cost of guarantees- Rs 23 billion.
The Cabinet was informed that potential losses stock was of Rs 5.2 trillion( 24 per cent of domestic debt stock), of which power sector circular debt- Rs 1.2 trillion, power(future capacity payments)- Rs 1.2 trillion, gas circular debt- Rs 0.3 trillion, food and fertilizer- Rs 0.5 trillion, guarantees PHPL- Rs 1 trillion and other potential losses- Rs 1 trillion.
According to the action plan phase-1, target electricity bill payments to Ehsaas beneficiaries only to be estimated after a survey. Pilot project in Islamabad match Iesco NON with Ehsaas data, then rollout including the KE. Industrial Support Package (Rs 3/ kwh - impact Rs 75 billion. It will be eliminated from July 1, 2021. Arrears will be calculated and settled by June 21.
It has been decided to direct Pepco/ CPPA-G to file a single tariff application to Nepra based on consolidated accounts. It has also been decided to enforce section 31(4) of Nepra Amendment Act, 2017. It has been recommended that potentially up to 200 billion average ( i) enables more accurate targeting;(ii) identifies subsidy size;(iii) remove cross-subsidization and ;(iv) indentify impact of surcharges. It has been proposed that slabs be removed and subsidies/ higher than average charges to be distinctly indentified on bill.
On capacity payments restructuring plan, the SAPM has recommended that deals be renegotiate deal with IPPs and finalized as early as possible. He has proposed that capacity payments should be restructured (loans, interest and RoE public sector & CEPC) loans, interest and RoE.
Discos should be privatized / handover management control of Discos to increase in recovery ratio.
The SAPM on Revenue also proposed that PHPL debt settlement plan be prepared. A plan be prepared for settlement of unpaid circular debt by indentifying overdue amounts across all power producers together with inter-agency dues. It has been proposed that the use of electricity be promoted, E-vehicles be promoted and incentivize additional use of electricity. It will reduce pressure on tariff increase.
During discussions, the Prime Minister stated that the reason for arranging this presentation was to apprise the Cabinet of the magnitude of the problem of subsides and grants, which were now close to Rs. 4 trillion that were almost equal to the total tax revenues. This situation was untenable as only further borrowing could sustain this level of subsidies. He exhorted the need to target the subsidies to support the poor and backward area only as well as the export-oriented industry, which is expected to assist in wealth creation.
A member enquired about the amount so far transferred to State Bank of Pakistan from the Federal Government deposits with scheduled banks. Finance Division stated that a decision had been made and the policy was being implemented. The Prime Minister directed that facts pertaining to the transfer of Federal Government deposits with scheduled banks to State Bank of Pakistan be calculated in one month's time.
The Cabinet took note of the presentation, made by Special Assistant to the Prime Minister on Revenue, on 'Rationalization of Subsidies and Grants' which helped fathom the various dimensions of the real issue of ongoing subsidies to plan phasing out of subsidies in the longer run in a holistic manner. The Cabinet agreed to adopt the following guiding principles for taking further steps to approach targeted subsides and grants: (i) subsidies should be allowed only for marginalized segments of society, backward areas of the country and wealth creation purposes such as supporting the export-oriented industry to make it competitive; and (ii) there should be a time-line for phasing out subsidies for low, middle and high income groups so that their impact is neutralised/managed in a socio-economically befitting manner.
The Cabinet further directed Finance Division to present the facts pertaining to transfer of Federal Government funds/deposits lying with scheduled banks to the State Bank of Pakistan in one month's time.
