Not the only answer: Power price hike

Note: Causes of expensive electricity and some facts and figures regarding indirect taxes and the fragile economy



THE steep rise in domestic electricity prices did not come unannounced. The government had been preparing the ground ever since it presented its first budget and it had raised industrial, commercial and bulk tariffs in August. In anticipation of an adverse public reaction, the government delayed introducing the new prices for domestic connections to minimise the impact on consumer bills because electricity usage at homes drops substantially as summer gives way to cooler months. It also short-circuited the standard procedure for determination of electricity prices by Nepra, giving the impression that it fears that public hearings by the regulator will be an impediment. The apex court has already taken notice of this failure to go through Nepra, and the opposition parties are set to raise the issue in parliament and press for withdrawal of the increase.

Though the prices have been increased by an average 30pc for various categories of consumers depending on consumption, the real impact of this move will be a lot more prohibitive for those falling in the fixed income bracket owing to withdrawal of the tariff slabs. The bill of an average household — already under pressure from surging fuel and food prices and the high incidence of indirect taxation — using between 201 and 300 units a month, for example, will now swell by almost 73pc. If the concomitant increase in sales tax on electricity consumption is also taken into account, the total financial impact on these households will be over 87pc. The government argues it has no option but to jack up power prices for ‘full cost recovery’ to cut its subsidy expenditure from 1.8pc of GDP to 0.3-0.4pc in three years to control its soaring budget deficit under the $6.6bn loan from the IMF.

The abrupt and exorbitant hike in electricity prices isn’t the only answer to the government’s financial difficulties. There are other ways to improve returns on generation and to cut power subsidy expenses. The government could focus on controlling the massive electricity theft and distribution losses, collecting unpaid bills from defaulters, improving governance and efficiency of the power sector and disallowing excessive billing by private power producers. This will help at least in part. The solution to its budget deficit woes lies in taxing the wealthy according to their income irrespective of its source. Unless it moves in this direction, it will not overcome its financial troubles. The increase in power prices will only stall economic growth and trigger more trouble for the government and the public.

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