Gas tariff increased owing to circular debt: Caretaker government
During a press conference held on Tuesday, the caretaker government explained that the approval of significant increases in fixed monthly charges and consumer rates for natural gas by the interim cabinet was aimed at alleviating the fiscal deficit.
In this press briefing, Energy Minister Muhammad Ali pointed out that Pakistan has been grappling with an inability to meet its domestic gas demand for the past decade, relying on imports, which had substantially depleted the country’s foreign exchange reserves.
“Because of rising fiscal deficit, we were prone to more borrowing,” he emphasized. “These loans are making us more vulnerable to inflation.”
Over the past decade, nearly all international natural gas exploration companies, with the exception of four, had ceased operations in Pakistan due to financial losses, rendering the country heavily reliant on gas imports to meet its demands.
“In January 2022 inflation was 13pc and in January 2023, it was 27pc.”
“Rising circular debt”
The minister also presented data, using bar charts, to underscore the importance of addressing circular debt, which had reached a staggering Rs2,100 billion. He warned that if left unchecked, it would have climbed to Rs2,400 billion.
“Circular debt has increased to Rs2,100 billion,” he added. “And if we did not stop it, it would have gone to Rs2,400 billion.”
“Ensuring Minimal Impact on the poor”
The energy minister further elucidated how the rise in gas prices would impact various sectors, assuring that 57% of the population would not bear the brunt of these increases. A fixed charge was implemented to ensure that their gas bills would not exceed Rs1,300, with tariffs increasing in accordance with consumption. This progressive approach would place a heavier burden on the wealthier segment of society while sparing the vulnerable.
He also mentioned that the hike would not affect local farmers in the fertiliser sector, aiming to reduce disparities between industries in the northern and southern regions of Pakistan, which had hindered competition and economic growth.
The overall objective of this gas price increase was to create a more balanced environment for industries in both the north and south of the country, fostering healthy competition and subsequently generating more employment opportunities.
The energy minister concluded the press conference by assuring that while this increase was necessary, there would be no sudden and massive hikes in the future.
Furthermore, the government announced a gas subsidy of Rs 384 billion, which would be provided to domestic consumers, the fertiliser industry, and roti tandoors. Rs 139 billion would be allocated to domestic consumers, Rs 45 billion to the fertiliser sector, and Rs 200 billion to roti tandoors. The minister emphasized that the gas sale price for roti tandoors remained unchanged due to the essential nature of “Roti” in daily life.
Understanding the ‘Terms’
What is Fiscal Deficit?
Fiscal deficit is the difference between a government’s total expenditures and its total revenues, excluding the borrowing costs. In other words, it represents the amount of money the government needs to borrow to cover its spending when its expenses surpass its income. A fiscal deficit occurs when a government spends more money than it generates through sources like taxes and other revenue streams. To bridge this gap, the government typically borrows money through the issuance of bonds or by other means. Managing fiscal deficits is an essential aspect of government finance, as large and persistent deficits can lead to increased debt levels and financial instability.
A country’s foreign exchange reserves, often referred to as forex reserves or foreign currency reserves, are the holdings of foreign currencies and other assets that a country’s central bank or monetary authority holds. These reserves are used to support the country’s currency, manage exchange rates, and ensure stability in international financial transactions.
Foreign exchange reserves typically include foreign currencies such as the US dollar, euro, yen, and others, as well as assets like gold, special drawing rights (SDRs) from the International Monetary Fund (IMF), and foreign government securities. These reserves are crucial for a country’s ability to meet its international financial obligations, stabilize its currency’s value, and address economic challenges, such as balance of payments crises.
Foreign exchange reserves can vary greatly from one country to another, and maintaining an adequate level of reserves is an important part of a country’s economic and monetary policy. These reserves are often used to intervene in the foreign exchange market to stabilize the country’s currency and ensure its liquidity in the global marketplace. They also provide a sense of financial security and confidence to international investors and trading partners.
Circular debt is a term commonly used in the context of energy or power sectors in various countries, including Pakistan. It refers to a recurring problem in which the government-owned power generation and distribution companies face financial challenges because they are unable to cover the costs of producing and supplying electricity due to a gap between the cost of production and the prices at which electricity is sold to consumers.
The cycle of circular debt typically involves the following steps:
1. Generation Costs: Power generation companies, which may include both state-owned and private entities, produce electricity at a cost that is often higher than the tariffs charged to consumers.
2. Subsidized Rates: To keep electricity affordable for consumers, the government sets electricity tariffs at a level that doesn’t fully cover the production costs. This results in a financial gap for power generation companies.
3. Late Payments: The government, or its entities, may not fully compensate power generation companies for their services on time. This delay in payments exacerbates the financial stress on these companies.
4. Borrowing: Power generation companies may have to borrow money to continue operations, maintain infrastructure, and procure fuel. This debt accumulates over time.
5. Utilities in Debt: The entities responsible for transmitting and distributing electricity (DISCOs) also face financial difficulties due to the gap between the subsidized rates and their operational costs.
6. Further Subsidies: To address the financial problems of DISCOs, the government may offer additional subsidies, which adds to its fiscal burden.
7. Continuing Cycle: This cycle continues to repeat as the problem is not fully resolved, and the debt keeps accumulating.
Circular debt, if left unaddressed, can have detrimental effects on a country’s energy sector and its overall economy. It places a significant financial burden on the government, affects the creditworthiness of energy companies, and can result in power outages and an unreliable energy supply. Various measures, including tariff adjustments, financial restructuring, and improving the efficiency of energy companies, are often taken to address and mitigate circular debt.
A tariff is a tax or duty imposed on imported or exported goods, typically by a government. Tariffs are used as a means of generating revenue for the government and regulating international trade. They can serve several purposes, including:
1. Revenue Generation: One of the primary purposes of tariffs is to generate income for the government. Import tariffs, in particular, provide a source of revenue for the government by taxing goods that enter the country.
2. Protection of Domestic Industries: Tariffs can be used to protect domestic industries from foreign competition. By imposing tariffs on imported goods, governments can make foreign products more expensive, thus giving a competitive advantage to domestically produced goods.
3. Control and Regulation: Tariffs can be used to control and regulate trade in certain industries or sectors, often for various policy objectives. For example, tariffs can be imposed on specific types of products to discourage their consumption, such as high tariffs on luxury goods or harmful products like tobacco.
4. Correction of Trade Imbalances: Tariffs can be used to address trade imbalances by reducing imports and increasing domestic production. This can help to protect a country’s trade interests.
There are various types of tariffs, including:
– Ad Valorem Tariff: This type of tariff is calculated as a percentage of the value of the imported or exported goods. For example, a 10% ad valorem tariff means that the tariff amount is 10% of the goods’ value.
– Specific Tariff: A specific tariff is a fixed amount of money charged per unit of a good, regardless of its value. For instance, a specific tariff might be $5 per barrel of oil.
– Compound Tariff: This combines elements of both ad valorem and specific tariffs.
– Protective Tariff: Protective tariffs are used to shield domestic industries from foreign competition by imposing higher taxes on imported goods.
– Revenue Tariff: Revenue tariffs are imposed primarily to generate income for the government rather than to protect domestic industries.
The use of tariffs is a tool of economic and trade policy, and its impact can vary widely depending on the specific objectives and circumstances of a country’s trade policy. Tariffs can have both positive and negative effects on a country’s economy, depending on how they are applied and the overall trade environment.