PAKISTAN RAISES ENERGY TARIFFS IN STEP TO REDUCE

UNCLAS ISLAMABAD 002381 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: PGOV EFIN ECON EAID ENRG PK SUBJECT: PAKISTAN RAISES ENERGY TARIFFS IN STEP TO REDUCE SECTOR DEBT REF: A. ISLAMABAD 2139 ¶B. ISLAMABAD 1983 ¶1. (SBU) Summary: The GOP raised electricity tariffs 6 percent, in accordance with its commitments to international financial institutions. However, lower fuel costs and higher hydropower generation simultaneously pushed tariffs down, reducing the immediate impact on consumers, and hence public outcry against the hike. Nevertheless, we should commend the GOP for taking an important first step in ensuring tariff collections are in line with energy sector generation and distribution costs. End Summary. ¶2. (SBU) On October 1, Prime Minister Gilani announced a 6 percent increase to Pakistan's energy tariff, the first of three price hikes agreed to with the World Bank and Asian Development Bank (ADB) and blessed by the IMF. Later in the day, NEPRA, Pakistan's energy tariff regulator, announced a 4.75 percent tariff decrease to reflect cheaper power production costs due to falling fuel oil prices and higher hydropower generation. The effective tariff increase for October is therefore 1.25 percent. ¶3. (SBU) Public reaction to the increase has been muted, met with some criticism in the media but not by public protests as was the case last fall. However, there could be a more active response at the end of the month when energy bills are sent out with the increase. But the larger concern would be if fuel prices rise, and the population feels the full pinch of the price hike. ¶4. (SBU) Business groups, including Pakistan's lead textile association and the Islamabad Chamber of Commerce, have publicly criticized the hike, noting that it significantly raises the cost of doing business. For example, textile producers claim that power already accounts for well over 30 percent of production costs in spinning and weaving. But as one leading industrialist told us privately, business leaders realize what is bad for their companies is good for Pakistan. ¶5. (SBU) As reported Ref B, the October 1 increase is the first of three tariff hikes that should bring revenue collection in line with energy production and distribution costs. The GOP agreed to further raise the tariff 12 percent on January 1, 2010 and 6 percent on April 1, 2010. Successfully implemented, the tariff hikes will ensure that inter-corporate and bank debt does not build up in the energy sector, spurring capital investment and improved energy delivery. ¶6. (SBU) Comment: It is a happy coincidence that the mandated tariff increase coincided with lower energy production costs, reducing the burden on consumers -- and the political cost -- in the immediate term. Nevertheless, we should commend the GOP for taking this first step and continue to bolster their commitment to tariff reform, especially as a larger and potentially more politically fraught tariff increase looms in January. FEIERSTEIN