The International Monetary Fund (IMF) has predicted that the energy situation in Pakistan will continue to improve if the government maintains the current pace of reforms.
In a report released on Tuesday, IMF also gave details of the negotiations its staff held with the authorities in Pakistan before endorsing the 11th review of a three-year, $6.4 billion Extended Fund Facility (EFF) signed in September 2013.
The review not only approved the next tranche of about $500 million but noted that the country’s short-term economic vulnerabilities had reduced and macroeconomic stability had improved.
The 85-page report also included a separate chapter on Pakistan’s energy sector, pointing out that Pakistan authorities remained committed to further moving ahead with the energy sector reform.
Since the start of the IMF programme, “power blackouts reduced, distribution losses were curtailed, payment collection rates increased, energy subsidies were reduced, electricity tariffs were increased, surcharges were introduced to allow for cost recovery, and the regulatory framework was strengthened,” the report added.
The IMF noted that Pakistan was making additional efforts to continue strengthening the performance and monitoring of power distribution companies (DISCOs). The report pointed out that while the outstanding stock of power sector arrears remains to be addressed, “new arrears are accumulating at a significantly reduced pace”.
The IMF acknowledged that despite some delays, the process for notification of the FY 2015/16 electricity tariffs and for setting up multi-year tariff frameworks for DISCOs had been advancing.
It regretted that due to political opposition and social tensions, Pakistani authorities revisited their plans for privatising DISCOs and decided to move ahead with an Initial Public Offering for a minority share in Faisalabad Electric Supply Company (FESCO), to be followed by other DISCOs.
The IMF also noted that improved performance of distribution companies and favourable oil prices had helped contain the accumulation of power sector arrears. The end-March 2016 indicative targets on the accumulation of power sector arrears was met with a large margin, owing to the positive impact of low oil prices, significant strengthening in collection rates, and further loss reduction.
Half of the DISCOs met their quarterly performance targets at end-March 2016, and the authorities were taking disciplinary actions against non-compliant DISCOs as appropriate, the report added.
The IMF acknowledged that Pakistani authorities’ are committed to strengthening DISCOs’ performance by reducing distribution losses, increasing payment collections, and improving revenue-based load shedding and customer service.
During the review process, the IMF staff commended the strengthening of DISCOs’ monitoring by the submission of their quarterly performance reports for the review and approval of the Economic Coordination Committee (ECC) of the cabinet and making them available to the public.
The IMF believed that setting up a multi-year tariff framework for DISCOs is expected to help strengthen the regulatory framework and attract investors. It endorsed the government’s claim that the multi-year tariffs for FESCO, Islamabad Electric Supply Corporation (IESCO) and Lahore Electric Supply Corporation (LESCO) aimed at reducing uncertainty for investors and preparing DISCOs for private sector participation. The multi-tariff bills would be notified with a delay by July 15, due to DISCOs’ review petitions to the regulator to revise benchmark distribution losses used for FY 2015/16 tariff determination.
The authorities in Pakistan were advancing in setting a multi-year tariff framework for the remaining DISCOs, of which three have prepared multi-year tariff petitions for FY 2016/17.
The IMF also noted that Pakistani authorities were updating the power sector arrears reduction plan. The authorities’ 2015 plan to limit the accumulation of new arrears and clear the outstanding stock rested in part on the planned privatisation of DISCOs. Changes to the privatisation strategy have prompted the authorities to update the plan, in consultation with development partners, by July 15. The IMF staff supported the authorities’ proposal to further tighten the indicative targets on arrears accumulation for end-June 2016, which is additional to the previous tightening in the context of the tenth review.
The report further noted that regulatory process for gas tariff determination had resumed and growing Liquefied Natural Gas (LNG) imports were strengthening supply to the domestic market. The authorities were resuming semi-annual notification of gas tariffs, key to ensuring cost recovery and strengthening the regulatory framework. They were increasing imports of LNG to tackle domestic gas shortages, with the price of imported LNG continuing to be fully passed through to consumers.
The IMF staff welcomed the authorities’ commitment to further reducing distribution losses, including by strengthening infrastructure and tackling gas theft.