- Eleventh country review report of IMF says Pakistan has assured that notification about multi-year tariffs for FESCO, LESCO and IESCO will be completed by July 15
- Pakistani authorities committed to moving ahead with energy sector reforms
- Efforts underway to continue strengthening performance, monitoring of DISCOs
Pakistan has assured the International Monetary Fund (IMF) that it would start off loading shares of its power distribution companies (DISCOs) on the stock exchange from November this year, while the previous system of bi-annum revision in natural gas tariff will be reintroduced from the current financial year.
According to the eleventh country review report and the performance criteria released by the IMF, the Pakistan government has assured that the notification about multi-year tariffs for the FESCO, LESCO and IESCO was delayed/missed (April-end 2016) and will be completed by July 15, 2016. Also the enactment of the legislation to establish a deposit protection scheme was delayed/missed (March-end) and will be completed by the end of August this year, adds the report.
Pakistani authorities are committed to further moving ahead with the energy sector reform. Efforts are underway to continue strengthening the performance and monitoring of power distribution companies (DISCOs). Although the outstanding stock of power sector arrears remains to be addressed, new arrears are accumulating at a significantly reduced pace.
Despite some delays, the process for notification of the fiscal year 2015-16 electricity tariffs and for setting up multi-year tariff frameworks for DISCOs is advancing. Due to political opposition and social tensions, the authorities revisited their plans for privatising the DISCOs and decided to move ahead with an initial public offering for a minority share in FESCO, to be followed by other DISCOs. Improved performance of the distribution companies and favourable oil prices have helped contain the accumulation of power sector arrears.
Setting up a multi-year tariff framework for the DISCOs is expected to help strengthen the regulatory framework and attract investors. The multi-year tariffs for the FESCO, IESCO and LESCO aimed at reducing uncertainty for investors and preparing DISCOs for private sector participation will be notified by July 15. The authorities are advancing in setting a multi-year tariff framework for the remaining DISCOs, of which three have prepared multi-year tariff petitions for the financial year 2016-17.
The regulatory process for gas tariff determination has resumed and growing LNG imports are strengthening supply to the domestic market. The authorities are resuming semi-annual notification of gas tariffs, key to ensure cost recovery and strengthen the regulatory framework. They are increasing imports of liquefied natural gas (LNG) to tackle domestic gas shortages, with the price of imported LNG continuing to be fully passed through to consumers. The authorities are committed to further reducing distribution losses by strengthening infrastructure and tackling gas theft.
The authorities remain committed to restructuring and attracting private sector participation in PSEs and are renewing efforts to contain PSEs’ losses. In light of legislative constraints, political opposition, and widespread strikes, the authorities have reassessed their strategy for PSEs, scaling back planned privatisation transactions but continuing efforts to attract private sector participation and putting in place additional measures to contain PSEs’ losses.
The report says macroeconomic stability has been strengthened and structural reforms are progressing. The economic recovery is gradually strengthening with improved macroeconomic stability. International reserves continue to rise amid a broadly stable current account deficit.
However, it noted that Pakistan’s exports fell by 9.2 per cent during the first three quarters of the fiscal year 2015-16 owing to lower international prices of cotton and rice, ongoing security issues, a poor business climate, and competitiveness losses related to real exchange rate appreciation.
However, favorable oil prices and so far robust remittances from the Gulf Cooperation Council (GCC) countries continue to counterbalance the decline in exports. The recovery in oil prices along with higher CPEC-related imports will likely lead to a widening of the current account deficit to about 1.8 per cent of the GDP in the FY 2016-17, still allowing for additional reserves accumulation to close to four and a half months of imports. Over the medium term, completed CPEC projects would contribute to promoting exports, offsetting the CPEC-related imports of industrial goods for investments.
The IMF report mentions medium to long-term risks arising from repayment obligations and profit repatriation related to large-scale investments such as those under CPEC, underscoring the need for careful coordination and monitoring.
The IMF has stressed reforming the FBR. It notes continued progress with tax administration reforms is needed to mobilise additional fiscal revenues. Pakistan is committed to accelerating the implementation of risk-based auditing and focusing on high net worth individuals and large companies for tax compliance and enforcement; ensuring data matching between domestic taxes and customs to identify non-compliant taxpayers and minimise under-declarations; improving FBR’s access to third-party information and data; continuing to take governance and anti-corruption measures at the FBR; seeking parliamentary ratification of the legislation against “benami” transactions; establishing a tax policy research and analysis unit outside the FBR. In addition, the authorities aim to modernise the general sales tax (GST) regime on goods and services in close coordination with the provinces.