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Power sector woes persist despite substantial tariff hike

Despite recommending substantial power tariff increases in Pakistan, multilateral creditors, including the International Monetary Fund (IMF), have conceded that the ultimate objective of eliminating the financial woes of the power sector could not be achieved.

“Efforts to eliminate the tariff differential subsidy for the electricity sector resulted into large increases in the power tariffs but attainment of ultimate objectives had to be postponed,” stated the draft report of ex-post evaluation of exceptional access under the 2008 Standby Arrangement (SBA) programme of IMF.

Furthermore, a report of the Asian Development Bank (ADB) showed that in the wake of severe energy outages, around 400,000 people became unemployed or underemployed, which resulted in an increase in poverty.

Meanwhile, the IMF report disclosed that the fund did not possess expertise for resolving the power sector problems, adding that the World Bank and the ADB assisted authorities concerned to prepare reform plan for the power sector.

“With the benefit of hindsight, however, these agencies (World Bank and ADB) did not have the necessary information for appraising the underlying problems in the power sector, which impaired the design of the IMF funded program,” the report added.

For the power sector, the last SBA during 2008 to 2011 was based on a more hands-off approach than adopted before in line with the recommendations of 2005 ex-post evaluation (EPA), the IMF report stated.

With severe power shortages and sectoral losses, the report said that resolving the sectoral problems was critical to IMF’s sponsored program. “At the same time, the Fund’s staff expertise in these complex technical issues is limited,” said the report.

The report added that accordingly the EPA 2005 recommended that the IMF staff could have focused more forcefully on overall quasi-fiscal deficit of the sector and asked the World Bank to design the specific measures that would improve performance of this sector in the short-run.

In line with the advice, the most recent programme of the IMF focused almost entirely on the targets for limiting the government’s contributions, leaving the discussion of the necessary underlying reforms to the World Bank and the ADB.

According to the IMF’s report, addressing the energy sector issues is essential for sustainable growth as lack of investment, price distortions and poor management of the sector have resulted in widespread outages, causing a large constraint on growth.

“Subsidies in the power sector amounting to about 1.3 percent of the gross domestic product (GDP) in 2007-8 increased to 1.6 percent of GDP in 2010-11,” the report stated and added that delays in subsidy payment had resulted in inter-corporate circular debt.

The IMF’s conditions to increase electricity tariff and to formulate, in collaboration with the World Bank, a plan for the elimination of subsidies were implemented with delays, mostly as a result of an inadequate diagnosis.

But power tariffs remain below cost recovery and the resolution of the circular debt in the energy sector was not completed, according to IMF’s report.

The circular debt was cleared at certain times, said the IMF report, concluding that the new circular debt emerged due mainly to non-payment by energy companies to suppliers and non-payment by government agencies.

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