The International Monetary Fund (IMF) has imposed stringent new conditions on Pakistan, with a primary focus on the Electricity Subsidy and provincial budgets. This development comes in response to Punjab’s “fiscally reckless” decision to allocate Rs45 to Rs90 billion in electricity subsidies over two months.
According to government sources, the IMF has set at least three critical conditions for the Punjab government, following the province’s decision to grant a Rs 14 per unit electricity subsidy for two months. The IMF has mandated the termination of this temporary subsidy by September 30th and has explicitly stated that no provincial government should offer any new electricity subsidy during the 37-month Extended Fund Facility (EEF) program.
These new conditions could jeopardize Punjab’s plans to allocate Rs 700 billion for providing solar panels to consumers with up to 500 units of monthly electricity consumption. One of the newly introduced IMF conditions specifies that the provinces must agree not to introduce any electricity or gas subsidy. This stance by the IMF challenges the claims that provincial governments can independently provide electricity subsidies and raises questions about Prime Minister Shehbaz Sharif’s previous encouragement for other provinces to follow Punjab’s lead.
The rising electricity costs, driven by poor governance, high line losses, increased taxes, and costly deals, have rendered electricity unaffordable for the majority of residential consumers. Prices have soared to Rs64 to Rs76 per unit for both residential and commercial consumers. In response, both the federal and Punjab provincial governments devised a two-month electricity subsidy plan as a temporary solution.
In August and September 2024, the Punjab government approved a Rs 14 per unit electricity subsidy for consumers in the province and Islamabad who use between 201 and 500 units. While the provincial finance minister estimated the actual cost of the subsidy at Rs 90 billion, the Chief Minister of Punjab stated that the cost would be Rs 45 billion.
Moreover, the IMF introduced another condition prohibiting any provincial government from implementing policies that could undermine commitments made under the $7 billion program, specifically regarding the Electricity Subsidy. This condition effectively restricts the fiscal autonomy of the four provincial governments, including their ability to offer any Electricity Subsidy. They have also committed to improving their tax systems, such as agriculture income tax, property tax, and sales tax on services.
Also Read: Punjab Power Subsidy Not Sustainable for Economy in Long Run: Bilawal Bhutto
Under a third new condition, provinces must consult with the Finance Ministry before modifying or adopting any measures that could affect the structural benchmarks and key actions agreed upon with the IMF, including those related to Electricity Subsidy. The ongoing IMF program, which has yet to receive board approval, is critical for Pakistan’s economic stability, covering five budgets and policies across five governments.
Also Read: Pakistan Not Included in IMF Agenda on August 28, 2024 Despite of SLA
The federal government is heavily reliant on over Rs 1.24 trillion in provincial cash surpluses to meet the IMF’s core requirement of a primary budget surplus. However, the Federal Board of Revenue’s (FBR) failure to meet its two-month target by Rs 98 billion could undermine the provinces’ ability to generate the required cash surpluses, especially considering the financial strains imposed by Electricity Subsidy obligations.
Also Read: PPP and PTI Condemn Punjab Government Power Subsidy Plan
In addition to Punjab’s challenges, the federal government’s decision to spend Rs 2.8 trillion to reduce electricity prices by up to Rs 6 per unit, which includes the Electricity Subsidy, has also raised concerns within the IMF. Last week, Pakistan presented a new plan to the IMF to reduce electricity prices, but the plan, which hinges on obtaining Rs1.4 trillion from the provinces and securing more commercial loans, has yet to gain the IMF’s approval.
