To meet the conditions of the International Monetary Fund’s (IMF) $3 billion loan program, Pakistan is gearing up for a substantial gas price hike, estimated to reach up to 41% by mid-February. This move, aimed at addressing the mounting circular debt, may contribute to a fresh wave of inflation in an already price-sensitive market.
IMF contends that raising gas prices is crucial to tackling the escalating circular debt in the gas sector, which reached Rs 2.1 trillion, equivalent to 2.5% of GDP, by the end of FY23, witnessing a significant 28% YoY increase.
Estimates suggest that state-owned gas distribution companies, including Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company (SSGC), might raise gas prices by 41% and 15%, respectively. If realized, this would bring the average price to Rs 1,753 per unit for SNGPL and Rs 1,696 per unit for SSGC.
The anticipated hikes aim to address revenue shortfalls, with SNGPL and SSGC looking to generate additional revenue through tariff hikes on locally produced and imported RLNG (re-gasified liquefied natural gas).
The potential gas price increase may impact domestic, commercial, and industrial users differently due to existing subsidy structures. The IMF recommends a uniform gas price for most consumers, advocating for the removal of cross-subsidy formulas.
In response, the government plans to disburse Rs 310 billion to government-owned power plants and independent power producers to alleviate circular debt in FY24. This injection of funds is expected to improve the cash flows of gas distribution companies and facilitate infrastructure investments to reduce losses.
With the power circular debt standing at Rs 2.5 trillion by September 2023, the updated circular debt management plan for FY24 prioritizes reforms such as price rationalization, private sector management of DISCOs, reduction of capacity payments, and the expansion of renewable energy capacity.
