In a move to fulfill the conditions of the International Monetary Fund’s (IMF) $3 billion loan program, the government is preparing for a significant increase in gas prices, estimated to reach up to 41% by mid-February. This decision, intended to tackle the growing circular debt, could trigger a new wave of inflation in an already price-sensitive market.
The IMF asserts that raising gas prices is crucial to address the mounting circular debt, according to a Wednesday news report by Express Tribune. If implemented, this would be the second fuel price increase within three months, following the adjustment in November 2023.
IMF data reveals that the circular debt in the gas sector surged to Rs 2.1 trillion, equivalent to 2.5% of GDP, by the end of FY23, experiencing a significant 28% YoY increase. Analysts estimate 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. 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 faced by these companies, with SNGPL and SSGC planning 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 advocates for a uniform gas price for most consumers, proposing the removal of cross-subsidy formulas.
In response to the impending surge, 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.
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 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.
