Islamabad: The government has postponed gas tariff increase until July 2015 and also given a commitment to the International Monetary Fund (IMF) that it will introduce fresh laws to restrict fiscal deficit below 4 per cent of GDP, and grant independence to the central bank as per international standards.
According to papers released by the IMF on Tuesday, Finance Minister Ishaq Dar explained that recent difficulties and oil-indexed decline in gas prices delayed the first gas price notification of fiscal year 2014-15 due in July.
“The loss in cost recovery incurred by gas companies due to the delay will be fully recuperated in the new tariff which we will notify and implement by July 2015,” the minister said while addressing the IMF’s concerns.
“We will also make any necessary adjustments to notify prices as needed when imported gas comes on-line so that cost of this gas will be fully reflected in the base tariff on a semi-annual basis,” wrote the finance minister.
The government has also given an undertaking to the IMF that at least six power sector companies will be privatised before Dec 31 next including three distribution companies of Islamabad, Lahore and Faisalabad.
The government has also promised to keep building additional costs into the consumer end power tariff while taking advantage of lower oil prices and reduce power sector subsidies to about Rs85 billion a year.
“Going forward, we are taking advantage of lower world oil prices to bring additional costs into the tariff base set by Nepra to strengthen cost recovery in the sector while allowing consumer prices to continue to fall,” Dar said.
He added that the government will ensure that technical loss diagnostic studies for all Discos will be finalised by June 2015 so that more realistic loss rates can be considered by Nepra in its fiscal year 2015-16 tariff determination.
Moreover, he expressed commitment of the government to “gradually reducing the effect that untargeted subsidies have on the budget” while continuing to protect the most vulnerable consumers.
“To that end, we will notify the 2014-15 tariffs by end-March 2015 consistent with our objective of reducing electricity subsidies further to 0.3pc of GDP for 2015-16 and of addressing the circular debt.
Dar also finally gave in to the demand of the IMF regarding independence of the central bank through legislation as one of the key priorities.
Following the earlier submission of amendments to the SBP Act to the assembly, the government will submit a revised draft law incorporating IMF staff’s comments.
The legislation, which is expected to be enacted in June 2015, will strengthen SBP’s operational independence, its governance structure and financial autonomy as well as personal autonomy of board members.
In the meantime, the SBP is taking steps to enhance its internal operations.
The IMF and the finance ministry have also agreed to put a legal bar on fiscal deficit at a maximum of 4pc of GDP through the parliament.
“We will prepare and submit to the parliament a draft 2015-16 budget with a deficit target of not more than 4pc of the GDP (excluding grants)”.
The adjustment will come from revenue enhancements and further rationalisation of untargeted subsidies. Revenue mobilisation will come mainly through further elimination of tax concessions and exemptions and broadening the tax base, with some contribution from improved tax administration.
These measures should help avoid the need for further increases in GST and incomes tax rates.
On the expenditure side, the government will continue to implement strategy to remove subsidies, along with steps to address the circular debt problem in the energy sector and to streamline public administration, including wage and salary costs.