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Budget buzz

By most accounts, this year’s budget is promising to be a bit of a non-event, even though some rather extraordinary things are happening in the run-up. The main reason for this is the near total absence of any large overriding political issue that could spill into parliament during the budget speech, or serve as obstacles to the passage of the finance bill.

What are the extraordinary things happening in the run-up? Here’s some of the buzz from Islamabad, as it’s unfolding at the Pakistan Secretariat.

The ministry of water and power is probably the ministry most saddled with obligations to explain itself. In off-the-record conversations with senior officials on the second floor of A block, where the ministry is housed, they are chasing after meeting a target for recoveries before the fiscal year concludes and reeling from the consequences of the Lahore High Court judgement that has struck down all surcharges in power bills as illegal.

Both priorities have their unique challenges. Accelerating recoveries without landing up in an overbilling scandal like what happened last summer, which cost the then secretary water and power her job, is a delicate balancing act. It involves applying the right quantity of pressure on those parties who have large outstanding payments, staying within the ambit of the law, and keeping their consent on board. Since a large portion of the outstanding recoveries are in Sindh and KP provinces, the support of the political leadership is also not available.

The consequences of the Lahore High Court judgement against surcharges are massive. According to unofficial figures, it could run up to Rs50billion or Rs55bn in the forthcoming year alone. In all likelihood, the ministry will seek a stay order on the judgement from the Supreme Court.

The water and power ministry is probably the ministry most saddled with obligations to explain itself. Complicating matters further is the government’s announced intention to reduce power subsidies by almost 50pc. This money will need to come from somewhere, and the pressure on recoveries will be even higher next year. Some tariff hike will become necessary as a consequence of this reduction in subsidies, but it remains to be seen by how much, and upon whom the burden of the hike will fall.

Another complication lurking in the background is the impact of the GIDC, that pesky charge on bulk gas consumers that has been such a thorn in the government’s side. The charge has to be collected retroactively since the law was revised in parliament last month. The fertiliser sector has already been collecting this cess from its consumers, but not depositing it with the government until the law was passed.

This means the fertiliser sector has already absorbed the inflationary impact of the cess. The industrial sector, primarily textiles, is negotiating on how the cess will be levied upon them, which is why the entire sector has suddenly gone silent after raising a hue and cry in the run-up to the passage of the law. But the power sector is left a little in the lurch. They have not been collecting the cess from their consumers thus far and are likely to become liable for paying it with retroactive effect. This means an additional hike in tariffs, although by how much it is not possible to say at the moment.

So two tariff hikes could be in the offing, both driven by the revenue constraints of the state. The quantum of the hikes is not possible to say at the moment though.

There is a silver lining here, however. Under a little known reform measure being pursued at A block, a small step in the direction of the market pricing of electricity has been taken. Two separate power-sector entities, CPPA and NTDC, have been separated. The former is responsible for processing all payments and settlement of power purchases. The latter is responsible for bulk transport of electricity.

Now CPPA has been made the buyer, acting autonomously, and a whole system to manage power purchases under it has been created. A new CEO has been hired to head the agency, with a background as a chartered accountant and plenty of experience in the power sector. And as its first hurrah, the newly created and empowered entity processed its first payment yesterday.

In due course, this reform measure is supposed to move the country’s power sector into the 21st century by bringing in a system where there are multiple sellers and buyers of bulk electricity, whose price is determined by a market that operates in real time much like the stock market does. This should do away with the role of Nepra in setting power tariffs and clear the way for greater participation by the private sector in generating and selling electricity in the country.

The absence of this step was a key stumbling block in the power-sector reforms, and if it bears fruit and is followed up with the right steps to expand the sway of the CPPA in serving as a clearing house for bulk electricity purchases in the country, there is a glimmer of hope that the power sector could find itself on the road to recovery. The key measure in this process will be the gradual elimination of the circular debt. Now that would be a giant leap indeed!

The ministry of petroleum, meanwhile, is still struggling with finding an interested party for buying imported LNG. It’s a pity that the terminal has entered commercial operations but no import of LNG is actually being processed through it. This could have been a large feather in the government’s cap that it could have worn with some pride during the budget speech.

Additionally, the crisis at PSO continues and word in the corridors of the secretariat has it that the oil supply chain is again in some difficulty. The power sector has consumed much of the reserves of furnace oil it had built up in the aftermath of the so-called petrol crisis, and once again a tug of war is under way between finance, petroleum and water and power to keep imports stable and running.

At the epicentre of the whole stressful run-up to the budget speech is the ministry of finance. What rabbit are they preparing to pull out of their hat? Not long before we find out.

The writer is a member of staff. khurram.husain@gmail.com, Twitter: @khurramhusain

Khurram Husain, "Budget buzz," Dawn. 2015-06-04.
Keywords: Economics , Socioeconomic aspects , Economic issues , Economic needs , Political issues , Petrol crisis , Electricity price , Economic inflation , Supreme court , Economy-Pakistan , Petroleum , Sindh , Pakistan , GIDC , Nepra