Govt plans up to 41pc gas price hike amid IMF loan conditions

The government is set to implement a significant increase in gas prices, which could rise by an average of up to 41% by mid-February.

This decision is part of the conditions tied to the ongoing $3 billion loan programme with the International Monetary Fund (IMF). This increase is expected to contribute to inflation, which is already a concern in the current market.

The IMF has emphasized the necessity of raising gas prices to address the growing issue of circular debt.

This would be the second fuel cost hike since November 2023. It is notable that Pakistan needs to implement its gas price increase by February 15, 2024, to meet IMF requirements.

IMF data indicates that the circular debt in the gas sector had reached Rs2.1 trillion, or 2.5% of the GDP, by the end of the last fiscal year, marking a 28% year-on-year increase.

State-owned gas distribution companies, including Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company (SSGC), are expected to raise gas prices.

SNGPL may increase prices by 41% or Rs506 per million British thermal units (mmbtu) to an average of Rs1,753 per unit. SSGC might raise fuel prices by 15% or Rs226 per mmbtu to an average of Rs1,696 per unit.

The price hikes are anticipated to help these companies address their revenue shortfalls. For instance, SNGPL, with a shortfall of Rs251.32 billion, is expected to generate additional revenue through these tariff increases.

Similarly, SSGC, with a shortfall of Rs65.90 billion, plans to cover this deficit through raised prices.

Currently, the government provides subsidized gas to residential consumers and fertilizer manufacturers, while commercial and industrial consumers face higher tariffs under the cross-subsidy formula.

The IMF advises eliminating the cross-subsidy equation and implementing a uniform gas price for almost all consumers. The recommended changes include semi-annual gas tariff adjustments, eliminating subsidies to the fertilizer sector, phasing out captive power usage, and establishing uniform rates for export and non-export sectors.

The government is also expected to allocate Rs310 billion to government-owned power plants and independent power producers to tackle circular debt. These funds would improve the cash flows of companies like SNGPL, SSGC, and Pakistan State Oil, enabling infrastructure investments.

The analysts noted that the gas companies foresee a Rs90 billion revenue shortfall from RLNG diversion. Timely revision of gas prices is expected to benefit Pakistan State Oil’s liquidity.

Additionally, Oil and Gas Development Company Limited is set to receive a settlement of Rs82 billion, enhancing its financial position. The government plans to convert term finance certificates to public debt, leading to savings.

The power sector’s circular debt was reported at Rs2.5 trillion by September 2023, with a significant increase in the current fiscal year. The updated circular debt management plan aims to prevent further debt accumulation in the power sector.

The financial gap in the power sector will be addressed through the budget subsidy, covering various costs and payments.