Pakistan has agreed with the International Monetary Fund to further hike the electricity tariff on quarterly adjustments basis by the end of the next month, an IMF report said on Tuesday.

According to the IMF, "an adequate pricing structure reflective of costs is essential to eliminate the accumulation of circular debt as new capacity comes into the system and to make the sector a more attractive investment opportunity."

It is likely that the increase will be of Rs2.5 per unit from the next month.

“Currently, households consuming 300 units or below (about 70 per cent of all household consumers) are insulated from annual tariff increases. The authorities will continue with this practice and will moreover allocate for this year a new subsidy equivalent to 0.1–0.2 per cent of GDP to insulate those same consumers from the impact of the recently introduced quarterly tariff adjustment,” the report said.

The IMF in its report stated, “Eliminating power sector losses on a sustainable basis will require both new pricing policies and improvements in governance and infrastructure. There are three main sources of arrears in the power sector: effective tariffs below the required levels and only approved with significant delays; implicit subsidies provided by the government that have long remained unbudgeted; and technical and distribution losses.

The authorities aim to address the first two sources in the near term while preparing a plan to tackle the third source of arrears over the course of the program.”

The IMF has suggested three measures which include, taking an adequate pricing structure reflective of costs, automatic quarterly adjustment of tariffs with a first tariff increase of over 10 per cent to generate PRs 150 billion in additional revenue (prior action). "This adjustment will help to address the circular debt accumulated over the first half of FY 2019. A second quarterly adjustment will take place before end-August.

Moreover, the FY 2020 electricity tariff schedule will be notified as determined by the regulator by end-September 2019 (structural benchmark)," the report stated.

The staff report further stated Pakistan’s economy is at a critical juncture. “Pakistan’s economy is facing risks of hike in oil prices in the international market and implementing policies under the IMF programme.” 

"The effectiveness of Pakistan’s AML/CFT regime must be urgently strengthened to support its exit from the Financial Action Task Force (FATF) list of jurisdictions with serious deficiencies," the report added.

Moreover, the IMF said Pakistan is facing significant economic challenges on the back of large fiscal and financial needs, with weak and unbalanced growth.

The monetary added, it will aim to tackle long-standing policy and structural weaknesses, restore macroeconomic stability, catalyze significant international financial support and promote strong and sustainable growth through the programme.

The report added, “A decisive fiscal consolidation is key to reducing the large public debt and building resilience, and the adoption of the FY 2020 budget is an important initial step. Achieving the fiscal objectives will require a multi-year revenue mobilization strategy to broaden the tax base and raise tax revenue in a well-balanced and equitable manner."

It said that the provinces also need to show a strong commitment to support the effort and to improve the efficiency of public spending. 

“A flexible market-determined exchange rate and an adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low. In this regard, measures to strengthen the State Bank of Pakistan’s (SBP) autonomy and eliminate central bank financing of the budget deficit will enable the SBP to deliver on its mandate of price and financial stability," the report added. 

The IMF report also suggested strong financial support to the authority's policy efforts by Pakistan’s international partners is essential to meet the large external financing needs in the coming years and allow the program to achieve its objectives.