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Power sector losses yet to be reduced: IMF

Power sector losses yet to be reduced: IMF

ISLAMABAD: Contrary to official claims, the International Monetary Fund said on Tuesday that Pakistan’s power sector losses could not be reduced during the 2014-15 fiscal year, with recoveries having declined by one per cent and circular debt remaining at two per cent (over Rs600 billion) of GDP.

“Technical and distribution losses in FY2014/15 remained flat and collections edged down by one per cent,” the IMF said in a report released on Tuesday after its executive board approved disbursement of $504 million on successful completion of talks with Pakistani officials led by Finance Minister Ishaq Dar.

Before launching the report, IMF mission chief for Pakistan Harrald Finger said at a video conference that Pakistan’s circular debt stood at “two per cent of GDP including that of the (power) holding company”, adding that the government, together with development partners, was trying to bring it down to a reasonable level.

Take a look: Govt assures IMF of more tariff adjustments

For this to achieve, Finance Minister Dar assured the IMF in writing that additional power tariff adjustments would be made to ensure 100 per cent cost recovery and alternative remedial measures would be taken to protect different surcharges on electricity imposed in recent months if struck down by the judiciary.

He confirmed that power sector payables stood at Rs313bn as of end-June 2015 and that “the stock of past arrears, including the Power Holding Company…remained at Rs335bn”.

The IMF said the Ministry of Water and Power had failed to honour the commitment made about meeting the target about reduction in electricity arrears. It agreed to fix structural benchmark for quarterly reviews for loss reduction and improved recoveries to ensure continuation of the IMF programme.

The IMF report also mentioned the problems and deficiencies in the power sector pointed out by the National Electric Power Regulatory Authority last week in its annual report 2014-15 and the auditor general’s report for audit year 2013-14.

In fact, Mr Finger said, the IMF had taken seriously the regulator’s report indicating serious challenges in the power sector and would take up the matter with the authorities when they meet again by the end of this month for the 9th review of the $6.64bn bailout package signed in September 2013.

He said the IMF would also discuss the government’s planned package for the textile sector during the upcoming review without saying if proposed package had been shared with the Fund at any level.

The IMF is of the opinion that a swift implementation of the plan to contain accumulation of arrears would remain important for improving the functioning of the power sector. It said the authorities were implementing the agreed power surcharges, including servicing debt in the Power Holding Company (Rs335bn at end-June 2015), and were allocating 0.1pc of GDP from the 2015-16 budget to reduce part of the circular debt.

“They missed the end-June 2015 indicative target on the flow of power sector arrears by Rs15bn (0.05pc of GDP), due to a temporary delay in implementation of some elements of the plan (non-recoveries from two local governments and excess line losses),” the IMF said. But, it added, the government recovered projected collections from these two areas and the September target remained achievable.

The IMF stressed that power sector distribution companies’ business plans (including reducing losses and strengthening collections) should be aligned with the arrears reduction plan (including the reduction of excess line losses).

It said Pakistan’s overall economic outlook was favourable with low inflation, robust growth and broadly balanced risks, but “downside risks have increased”.

The IMF identified key domestic downside risks as slippages in policy implementation, ongoing legal challenges to power surcharges, and the still challenging political and security conditions, which could affect economic activities and undermine fiscal consolidation.

External vulnerabilities include a protracted period of slower growth in key advanced and emerging market economies, including China, which could weaken exports and hurt remittances while dollar appreciation and rupee exchange rate could further erode export competitiveness.

Asked if the IMF was satisfied with the economic data provided by Pakistani authorities, Mr Finger said there was a lot of room for improvement in Pakistan’s economic data but it did not have any evidence of manipulation.

He said he was optimistic about early passage of the law to grant full autonomy to the State Bank of Pakistan and enactment of legislation against ‘Benami’ accounts to increase the number of taxpayers.

Published in Dawn, October 7th, 2015

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