Zero-rated industries: the Ministry of Finance does not know how to finance concessional electricity

ISLAMABAD: The high bureaucracy of the Ministry of Finance would be perplexed as to where to organize Rs 144 billion to ensure the supply of electricity to five zero-rated sectors at Rs 19.99 / kWh from October 2022 to June 2023, as well as the payment of the previous grant amount owed to Power Division, informed sources said company registrar.

The International Monetary Fund (IMF) and other international financial institutions do not support any subsidy to the rich and insist that the subsidy be targeted to the poor segments.

The Finance Division further stated that should additional funding be required, the matter should be discussed with the IMF, in consultation with the Ministry of Energy, as required.

The then finance minister, Dr Miftah Ismail, who opposed maintaining preferential tariffs in five zero-rated sectors after September 2022, was forced to bow to pressure from the prime minister, after which the cabinet approved the maintenance of preferential rates. However, the finance division later managed to overrule the Cabinet decision through a summary to the Prime Minister, which was not shared with either the Commerce Department or the Electricity Division.

The problem of preferential tariffs of five sectors with zero rates will soon be solved: MoC

Insiders say the government’s decision to supply power to five zero-rated sectors at Rs 19.99/kWh could become a stumbling block in the success of the IMF’s upcoming quarterly review.

The Ministry of Finance has already opposed any subsidy to five export-oriented sectors beyond the approved amount of Rs 20 billion for the whole financial year.

Finance Minister Senator Ishaq Dar, who would have faced tough questions from the IMF and the World Bank at their annual meeting in Washington DC (October 10-16), had, before his departure, agreed with representatives of five zero-rated sectors that the government would supply them with electricity at Rs 19.99/kWh until June 2023 – an amount which was unfunded. Later, the ECC also ratified the decision of the Minister of Finance with the management of the Energy Division to bring a summary to the ECC on this issue.

The sources said that the Electricity Distribution Companies (Discos) provided subsidies amounting to Rs 103.319 billion to the export oriented sectors from January 1, 2019 to June 2022. Finance Division; however, it has only provided 77.25 billion rupees so far, leaving an outstanding amount of 26.069 billion rupees.

According to sources, the all-inclusive concessional tariff of Rs 19.99/kWh to export-oriented sectors from October 2022 to June 2023 is expected to require an additional amount of Rs 110.757 billion.

The sources maintained that an amount of 26.069 billion rupees is still outstanding against the supply of electricity at 6.5 cents/kWh, with the finance division only releasing 77.25 billion rupees against claims of 103.319 Rs 1 billion from January 1, 2019 to June 2022. Another Rs 7 billion is also unpaid from the period of August 1, 2022 to September 30, 2022, with the finance division releasing Rs 20 billion against claims of Rs 27 billion. The estimated funds needed from October 1, 2022 to June 30, 2023 is Rs 110.757 billion, implying that the Finance Division needs to arrange Rs 143.826 billion to ensure electricity supply to five zero-rated sectors as agreed.

Power Division, sources said, has urged the government to approve Rs 143.826 billion as an additional subsidy for the continuation of the concessional power package of Rs 19.99/kWh all-inclusive to the five export-oriented sectors from October 1, 2022 as of June 30, 2023.

On October 19, 2022, Power Division in a letter advised all Discos and K-Electric to supply power at Rs 19.99/kWh all inclusive to the five export oriented industries (i.e. i.e. textiles, leather, carpets, surgical and sporting goods) from October 1, 2022 to June 2023.

The ECC, sources said, will likely consider the Energy Division’s proposal at its next meeting which will be chaired by Finance Minister Dar.

Copyright Business Recorder, 2022

Rosemary C. Kearney