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The government on Monday approved Rs68 billion in electricity and gas subsidies for a class of exporters and Karachi’s industrial consumers but pended a decision about similar subsidies for farmers, as political commitments far exceed narrowing fiscal space.

The Economic Coordination Committee (ECC) of the cabinet approved the Rs68 billion subsidies for five export-oriented sectors and incremental use of electricity by industrial consumers of Karachi. But the cabinet body did not take two other decisions that would have cost the government another Rs74 billion on account of agriculture tube well subsidies (Rs48 billion) and time of use meters industrial consumers (Rs26 billion).

Against Rs68 billion subsidies, the available budget was only Rs49 billion and the rest of the Rs23 billion will be provided in supplementary budget, which means without seeking prior approval of the parliament. Finance Minister Shaukat Tarin presided over the ECC meeting.

“Full subsidy will be provided through supplementary grant, but, when it is earned,” said Tarin while responding to a question by The Express Tribune.

The Ministry of Commerce presented a summary regarding continuation of concessional rates of electricity and RLNG to export-oriented sectors. The commerce secretary briefed the committee that extension of concessional rates of electricity and RLNG was important for sustained increase in exports by providing energy at regionally competitive rates, according to finance ministry statement.

“After due deliberations, the committee approved the continuation of electricity and gas subsidy for export-oriented sectors to support the momentum of growth in exports during the FY 2021-22,” according to the official handout. The commerce ministry led committee had recommended continuing supply of electricity at nine US cents per unit and gas at $6.5 mmbtu to export-oriented sectors until the time the allocated budget is exhausted in this fiscal year.

Energy Ministry Hammad Azhar was of the opinion that untargeted subsidies were unsustainable that that his ministry did not have objection to the subsidy, provided the Finance Division give Rs35 billion for electricity subsidy and another Rs29 billion for gas subsidy.

In the budget, the parliament approved Rs26.9 billion electricity subsidy for exporters and Rs10 billion for RLNG, showing a gap of Rs27.1 billion or 42% of the required needs. The finance ministry is said to have increased the total allocations to Rs45 billion, which still leave behind a gap of Rs19 billion. About two-third of the total exports are made by textile, jute, leather, carpet, surgical and sports goods and the commerce ministry insisted that 14% increase in exports in the last fiscal year was due to concessional energy prices. However, the increase was over low base of the preceding fiscal year.

The finance minister emphasised the need to incentivise export-oriented sectors in order to take our exports to the next level. At the same time, the finance minister stressed the need to rationalise usage of energy inputs. The ECC constituted a sub-committee comprising minister for energy, minister for industries & production, adviser on commerce, planning commission deputy chairman, additional secretary (CF) Finance Division and other relevant officials for presenting a plan to resolve the issue of continued use of gas by some units for power generation and non-cooperation in audit of such use. The sub-committee was directed to present its recommendations before ECC within 30 days for further deliberation.

Industrial package

The ECC considered and approved a summary presented by the Power Division for extension of incremental consumption package for K-Electric industrial consumers of 10 government-owned power distribution companies & K-Electric and application of incremental consumption package for BI (Non ToU) consumers of ex-Wapda distribution companies and K-Electric at the rate of Rs12.96/kwh from July 1, 2021 to December 31, 2021, according to the finance ministry.

The K-Electric industrial consumers will get Rs1.65 per unit subsidy on additional use of electricity as compared to the first half of the last fiscal year. The energy ministry warned that increase in load due to enhanced consumption of electricity may also result in constrained load-shedding for K-Electric consumers.

At present, the marginal cost of K-Electric is Rs14.61 per unit and extension of the package till October 2023 will require additional subsidy of Rs11.2 billion. However, the ECC decided to extend it till December that will cost additional Rs4.1 billion.

The Cabinet Committee on Energy (CCOE) had also approved abolishment of time of use tariff scheme for industrial consumers and extended the existing package to June 2022, which also require another subsidy of Rs26 billion. But the ECC did not take a decision about giving subsidies to industrial time of use meters, although the National Electric Power Regulatory Authority (Nepra) has also allowed such subsidies.

The Pakistan Tehreek-e-Insaf (PTI) government has announced various subsidy packages for industrial, commercial agriculture and domestic consumers. But it has not been able to provide full subsidies cover due to limited fiscal space. In the budget, Rs330 billion have been allocated for subsidies, which are Rs180 billion less than what the Power Division had asked for while keeping in mind the subsidies requirement. The gap of Rs180 billion has further swelled after approval of fresh subsidies and keeping some of the outstanding issues unsettled, like agriculture tube wells.

Agri-tube wells

The ECC deliberated over another summary to approve subsidy for agriculture tube wells to extend the electricity at Rs5.35 per unit. However, it pended the decision for Prime Minister Imran Khan and the provincial governments.

“On agriculture tube wells dialogue with provinces has to take place,” Tarin told The Express Tribune.

Sources said that during the ECC meeting Tarin urged the provincial governments to take their responsibilities under the 7th National Finance Commission award. Agriculture is a devolved subject but is still heavily funded by the federal government.

The sources said that the finance minister urged the provinces to spend on farmers instead of creating cash surpluses for budget accounting purposes. In 2016-17, the then government had decided to provide electricity to agriculture tube wells at Rs5.35 per unit and the GST rate to be paid by the provincial governments.

However, majority of the power distribution companies said that the provincial governments were not paying GST related claims since June 2018. This had resulted into arrears of Rs31.7 billion by February 2021. After fiscal year 2019-20, the federal government was also not paying fixed charges that resulted into Rs16.7 billion overdues. The provincial governments have refused to pay GST dues in June this year and asked to recover the amount from the consumers.

“The distribution companies have intimated that in case GST and fixed charges are passed on to the consumers, the possibility of serious law and order issues cannot be ruled out.”

Since the provincial governments do not agree to pay the GST, the full amount would be passed to the consumers in the respective distribution companies from the August billing cycle.

The fixed charges will be part of subsidy and an amount of Rs9.24 billion may be provided as supplementary grant for this fiscal year, if not possible, this may be passed on to end consumers. The Ministry of Finance has recommended deducting the GST and fixed charges from the provincial transfers at source.

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