The new government will inherit massive economic challenges and the incumbents will have to take tough decisions in early days to correct the imbalances. Enough has been written on the external account woes and reaching out to IMF is probably the only way to bailout. The fiscal slippages are no less alarming and the energy prices ought to be adjusted with or without IMF intervention.
It is not going to be an easy ride for the new government which could be a weak coalition. The energy prices ought to be increased in early days, the power sector circular debt has grown to an uncomfortable level with average monthly receivables of IPPs standing around 12.3 months. For details read “Dealing with circular debt" published on 6th April 2018.
The need for revision in gas prices is even more pressing. There has been no change in gas prices for the past four years while the cost has kept on increasing due to increase in wellhead gas prices linked to international crude, gas pipeline infrastructure expansion and higher UFG losses than permissible.
The number increased by Rs36.9 billion in FY17 (Rs3.1bn per month), in the 1QFY18, the differential increase was mere Rs4.6 billion and the gap accelerated since then. At that time, the issue was raised by this newspaper, for details read “Gas prices must go up" published on 9th November 2017.
In the second quarter, the differential jumped at monthly rate of Rs7 billion to take quarterly increase at Rs21 billion. In the latest financial accounts of SNGPL, the differential margin recoverable increased by a staggering Rs18 billion in Jan-Mar18, making monthly increase at Rs6 billion.
With growing stock of differential margin which is currently standing at Rs133 billion, sooner the price increase better it will be for correcting imbalances.
The piling up of receivables has a direct implication on payables of the company. SNGPL trade payables increased by Rs91 billion in Jul-Mar to stand at Rs199 billion.
These are fueling circular debt and have an indirect implication of power sector circular debt. Out of these payables, Rs26 billion is owed to PSO and Rs11 billion to Pakistan LNG limited while PPL and OGDC cash flows are adversely effected by differential of SNGP cost and sale price.
Had the prices issued been resolved earlier, the differential claims would have not grown out of proportion. However, now these have to be adjusted through one time subsidy to clear circular debt followed by gas price increase to arrest the fast growing rate of differential.
The gas marketing companies and OGRA are pleading for price hike to settle the differential margin by increasing gas tariffs. The recommendation is of 70-80 percent price increase to take natural gas prices to around $7.5 per MMBTU.
This increase should have been done in staged manner in the past four years to not stop the differential from growing so much but also to reduce the gap between imported RLNG and domestic gas prices which is creating unnecessary distortion in the gas market.
The price differential between natural gas and imported RLNG is increasing as the latter prices are pegged to international oil prices which are heading north. The natural gas consumers are paying around $4.5 per MMBTU while LNG is costing consumers around $11 per MMBTU.
The industry is not buying RLNG as they see domestic gas prices at deep discount. Once, the domestic gas prices are increased to $7.5-8 per MMBTU, and RLNG prices are reduced due to lower GST proposed, the gap will be reduced to acceptable levels.
There must be one price for all gas consumers. The RLNG should have been added into the mix and weighted average price should have been applied for all. Now a similar decision should be taken by next government in early days.
But it is already too late as tax payers have to take the brunt of already piled up in differential margins as some mechanism will be in place to clear the circular debt which would have direct or indirect fiscal implication. Concurrently, gas prices will be revised up.
The question is: what is the gain from not increasing prices in the past four years? Was it the temporary relief to one fourth of consumers who inefficiently burn gas in stoves and geysers? The cost for this so-called relief is going to be too high. The decision must be made by OGRA which is supposed to be independent.