The International Monetary Fund (IMF) on Monday turned down Pakistan’s proposals to settle Rs1.3 trillion of energy sector circular debt and reduce electricity prices for industries, saying these proposals would overburden the residential consumers and also carry fiscal risks.

“The proposed (industrial tariff reduction) plan does not address the underlying problems and in particular, the circular debt neutrality of the tariff rationalization plan is doubtful,” IMF’s Mission Chief to Pakistan Nathan Porter said in a statement issued on Monday.

The IMF’s public disapproval of both the plans dampens the hopes of the interim government that was expecting to at least settle over one-fifth of the energy sector circular debt before leaving office.

The mission chief further added that the industrial tariff reduction plan “would place a significant additional burden on vulnerable households”.

The interim government had proposed to reduce the cross-subsidy burden of the industrial sector by 91% or Rs222 billion and in return it suggested to increase the subsidy burden of the residential consumers of over 400 units by 41% or Rs22 billion.

The government’s plan was also throwing an additional burden of Rs50 to Rs3,000 per month fixed charges in the electricity bills of all residential consumers.

The interim government’s proposal would have put an additional burden on the already overburdened residential consumers who are now facing extreme difficulties in paying their monthly bills.

“We will share our views on the IMF’s concerns and will continue our engagement on circular debt reduction and tariff rationalization to work towards finding common grounds to address both issues faced by the country’s power sector,” Energy Minister Mohammad Ali told The Express Tribune.

Porter said restoring the viability of the energy sector was critical to Pakistan's economic recovery and fiscal sustainability. However, it is essential for the government to focus on broad-based reforms, including reducing the high cost of energy, improving compliance and reducing theft and line losses.

He also emphasized focusing on ending gas to the captive power plants owned by the industrialists and fixing the governance and management of distribution companies (DISCOs), as well as keeping up with regular tariff adjustments to address the circular debt issue.

Read: SIFC pushes for IMF nod on Rs1.27t energy debt

The consumers of up to 400 units of equal monthly consumption are receiving Rs592 billion subsidies at Rs13.65 per unit rate. Out of this Rs592 billion, the lifeline and protected consumers get Rs375 billion subsidies –a burden that the federal government should pick instead of passing on to other consumers.

The industrial consumer is paying Rs8.61 per unit subsidy and the residential consumer using more than 400 units is paying Rs5.88 per unit.

However, the government’s plan was about relieving industrialists from their Rs8.61 per unit burden but adding into the burden of Rs5.88 per unit of the industrial consumers.

Circular debt plan also rejected

The IMF has also not approved the government’s proposal to reduce the circular debt by 22% or Rs1.27 trillion by using Rs902 billion supplementary grants.

“The circular debt reduction plan entails fiscal risks given the chain of transactions involved and would also continue the use of supplementary grants which have placed a considerable burden on the fiscal accounts in recent years,” said the mission chief.

But Porter said the IMF was open to working with the government and other international partners to advance a sustainable reform plan addressing the issues mentioned above which, if successfully implemented, would allow tariffs for all classes of consumers to fall.

The circular debt stands at Rs5.72 trillion as of November last year.

The government had proposed to reduce Rs1 trillion gas sector debt and another Rs255 billion power sector debt through use of the Rs902 billion budget and the dividends of the gas exploration and production companies owned by the government.

The IMF was told that a grant of Rs745 billion was needed for only two days to trigger the entire process. The actual funds that would go back to the kitty in the shape of dividends and taxes would be Rs748 billion, they claimed in the plan submitted to the IMF.

Once implemented, the gas sector debt will come down from over Rs3 trillion to Rs2 trillion. The power sector circular debt will drop to Rs2.5 trillion.

Out of the Rs902 billion supplementary grant, the lion’s share of Rs556 billion, or 62%, was planned to be given to one firm – the Oil and Gas Development Company (OGDCL).

The market prices of the OGDCL and the Pakistan Petroleum Limited (PPL) kept swinging during the period the plan was under review of the Special Investment Facilitation Council and the IMF.