Pakistan’s Federal Cabinet has approved a plan to increase power tariffs and end subsidies ahead of virtual talks with the International Monetary Fund (IMF) starting today. The cabinet approved a revised circular debt management plan, which will include jacking up power prices by Rs7.91 per unit in four quarterly adjustments, February-March 2023, March-May 2023, June-August and September-November. The government will charge Rs3.21 per unit starting now, Rs0.69 from March-May and increase it again by Rs1.64 per unit from June to August 2023. From September-November, the government will hike the power tariff by Rs1.98 per unit. The consumer base tariff will increase from Rs15.28 per unit in June 2022 to Rs23.39 per unit by June 2023.
The government has also approved ending the electricity subsidy of Rs65 billion given to exporters, starting in March 2023. The government will collect Rs51 billion from the withdrawal of electricity subsidies for exporters, and Rs14 billion by ending the subsidy on electricity under the Kissan Package. For the export sector, the Rs12.13 per unit subsidy on electricity will be taken back. The government plans to recover about Rs250 billion from electricity consumers by June 2023, including a surcharge of Rs3.39 per unit.
The IMF has shared its menu of economic policies with the Pakistani authorities, but gaps still exist in finalizing the exact taxation measures, increasing the base tariff for electricity, and securing confirmation on gross external financing. The Pakistani side will have virtual discussions with the IMF today to finalize the measures. The IMF is proposing the raising of the Goods and Services Tax (GST) from 17 to 18%, imposing GST on POL products, and increasing the petroleum levy on energy.
The Tax Laws Amendment Ordinance 2023 is expected to be passed this week, probably on February 15, to fetch an additional tax of Rs170 billion in the remaining four and a half months of the current fiscal year. The increase in the 1% GST rate from 17 to 18% will fetch Rs60 to Rs65 billion, raising the withholding tax on banking transactions to Rs45 billion, hiking the Federal Excise Duty (FED) on sugary drinks, increasing the FED on locally manufactured and imported vehicles, and increasing the FED on cigarettes.
In the power sector, the IMF wants a hike in the base tariff, as the government approved a revised circular debt management plan to reduce the piling up of debt. However, the IMF does not agree with the government’s argument that they increased the base tariff last August 2022 and is asking for an increase of Rs4.06 per unit. The most complex issue being faced by the economic managers is ensuring secure external financing needs so that the foreign exchange reserves can be built up from their current level of $2.9 billion by June 30, 2023.
In conclusion, the virtual talks between the Pakistani government and the IMF are expected to finalize the measures necessary to build up foreign exchange reserves and reduce the circular debt in the power sector.
