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Power subsidies remain major concern

09 May, 2013

KARACHI: The Tariff Differential Subsidy (TDS) on electricity of around Rs 3.5 per unit provided by the government is causing a huge strain on the country's revenues as the government is charging an average rate of Rs 9.0 per unit from consumers as against its average purchase price of Rs 12.50 per unit.

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KARACHI: The Tariff Differential Subsidy (TDS) on electricity of around Rs 3.5 per unit provided by the government is causing a huge strain on the country's revenues as the government is charging an average rate of Rs 9.0 per unit from consumers as against its average purchase price of Rs 12.50 per unit.

This has been causing a huge strain on the government's revenues thus augmenting the budgetary deficit further. The government disbursed a power subsidy of Rs 464 billion during fiscal year 2011-12 as against budgeted target of Rs 147 billion (revised target for FY12 Rs 464 billion).

Power subsidy target for FY 2012-13 was set at Rs 185 billion, 60 percent lower than the actual subsidy provided during FY12. The subsidy provided year-to-date (YTD) is Rs 311 billion, already having exceeded the target by 68 percent.

Invest Capital analyst Hassaan Bin Ghafoor told to this scribe that the massive power subsidy is an unproductive burden on the existing dearth of funds, and such a situation cannot last for long.

Furthermore, dwindling forex reserves have been a major concern for our import-oriented economy, he added. The country's forex reserves have declined by 23 percent YTD from $15.29 billion to $11.76billion (as of April 26, 2013) whereas the repayment of $570 million to the International Monetary Fund (IMF) under its Stand-by Arrangement (SBA) loan is due in May 2013.

Moreover, the outstanding balance of SBA arrangement being $2.1billion is payable by June 2014. The analyst expected such rock-bottomed forex reserves to compel the government to enter the IMF programme for the Extended Fund Facility (EFF).

One of the prerequisites for this EFF facility is to eliminate power subsidies through tariff hike. Therefore, the analyst expects the government to face a tough situation ahead, having to choose between falling reserves (and increasing power tariff in order to qualify for the IMF facility) and promoting economic growth by keeping electricity affordable.

Ghafoor further added that hike in tariff is the only way out from this situation as currently government is considering a tariff hike of Rs 4.8 per unit taking average tariff to Rs 14 per unit in order to reduce power subsidies and thus being eligible for the IMF facility.

This potential tariff hike is expected to completely eliminate TDS and also cover a significant portion of transmission and distribution losses at the expense of a higher inflation and lower economic growth. Considering the fact that newly elected government will take firm steps to promote economic growth, he expected the tariff hike of Rs 3-4 per unit going forward.

Differential

Govt purchase price Rs 12.50

Govt charging Rs 9

TDS Rs 3.50

End.


 
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