New govt to take tough budgetary decisions to curb power crisis


The prevailing gap between demand and supply of power is estimated at 3,500 to 4,000 megawatts. The analysts believe that this deficit is expected to further widen to 5,000 to 7,000MW during the peak demand season.
Such massive power outages would translate into 18 to 20 hours of load shedding, warned the analysts at InvestCap Research.
The current power sector generation situation in the country calls for an urgent plan that is both comprehensive and balanced in order to rescue both the sector and the economy as a whole from the crisis currently faced, said the analysts.
They said the “destructive” inter corporate circular debt level has swelled to around Rs400bn in 2013 from Rs144bn in 2008 and its resolution is expected to be the government’s top priority in the upcoming budget.
“We believe a partial settlement is likely to take place to clear off the dues of the energy sector chain in the FY14 budget,” they said.
This the government would be doing through increasing electricity tariff or further issuance of TFCs that in turn would propel the interest payments of TFCs.
About the IMF program’s pros and cons, the analysts anticipate a likely re-entry of Islamabad into the new IMF program through Extended Fund Facility as against Standby Arrangement.
This, they said, would be better considering the long-term repayment period of 7yrs-10yrs further supporting the dwindling foreign reserves.
“We believe, in order to avail this facility, the government will be required to take tough decisions that are expected to be i) reduction in power subsidies through tariff hike and ii) revenue expansion through healthier tax collection,” said the analysts.
Going forward, they said, such a rise in tariff amplified the cost of production through inflationary pressure and thus an impediment on economic growth.
“However, we expect the upcoming budget to announce an even-handed increase in tariff in order to fulfil the IMF requirement,” the observers said. “We expect a trade off between increase in electricity prices and its possible negative impact on tariff collection,” said they.
The government’s intention of tariff increase in FY14 and likely TFC issuance coupled with stable to downward trajectory of international oil prices is expected to improve the cash flows of the IPPs while easing the intensity of the mounting circular debt.
This, they said, would help the IPPs to reduce their reliance on short term borrowing thus resulting in improvement in the sector’s profitability. The power sector, the analysts said, was one of our most favourites in the current scenario, given the sectors importance in achieving the desired economic growth and its contribution in solution of other macro-economic issues.
“We expect the IPP’s under our coverage to enjoy the due benefits once the (partial) resolution of circular debt takes place,” the analysts said.