KARACHI: In pursuit of meeting the International Monetary Fund’s (IMF) $3 billion loan program requirements, the government is preparing for a significant gas price hike, projected to reach up to 41 percent by mid-February. This move, aimed at addressing the growing circular debt, could potentially trigger a new wave of inflation in an already price-sensitive market.
The IMF argues that increasing gas prices is essential to tackle the mounting circular debt, as reported by Express Tribune on Wednesday. If implemented, this would mark the second fuel price increase within three months, following the adjustment in November 2023.
According to IMF data, the circular debt in the gas sector surged to Rs 2.1 trillion, equivalent to 2.5 percent of GDP, by the end of FY23, witnessing a significant 28 percent year-on-year increase.
Analyst 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 percent and 15 percent, 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 are expected to address revenue shortfalls faced by these companies, with SNGPL and SSGC aiming to generate additional revenue through tariff hikes on locally produced and imported RLNG (re-gasified liquefied natural gas).
The potential gas price increase may vary across consumer sectors, impacting 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 to the impending surge, the government is set 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.
Analysts highlight the positive impact of timely gas price revisions on entities like Pakistan State Oil (PSO) and Oil and Gas Development Company Limited (OGDCL), improving liquidity and aiding in the settlement of outstanding amounts.
With the power circular debt standing at Rs 2.5 trillion by September 2023, the updated circular debt management plan (CDMP) for FY24 aims to prevent further accumulation and prioritizes reforms such as price rationalization, private sector management of DISCOs, reduction of capacity payments, and the expansion of renewable energy capacity.
