THE winter may bring renewed vulnerabilities stemming from energy and fiscal crises that may keep the government focused on fire fighting in an election year.

The balance of payment and exchange rate seem to be moving in the red zone. The trigger point here is a $1.1 billion installment of repayment to the IMF in February 2013. A total of about $2.8 billion are due to the IMF within this fiscal year.

Higher international oil prices and increased imports of expensive fuel oil for power generation to compensate for plummeting hydropower and gas supplies would add to the existing pressure on external account.

With the political parties already in election gear, management of energy crisis – both electricity and gas – would remain on top of the government priorities; they cannot afford to see widespread protests against energy shortages and hence would pump as much money as possible for expensive replacement fuels.

These possible capital injections carry multi-pronged repercussions, from higher fiscal deficit to falling foreign exchange reserves and erosion of rupee value against international currencies. With official reserves at just $10 billion or so (remaining $5 billion belonging to individuals and commercial banks) at the moment, the government officials agree that reserves position hits panic button at $7 billion mark A current account deficit in excess of $2.5 billion could take external sector to that level.

This is to happen when the IMF seems reluctant to bail out a government on the last leg of its tenure or talk to an interim government, given past failures in nine out of 10 programmes. Unless influenced by the US, the IMF would like to offer its financial assistance when a new government is in office and ready to own reform agenda at the very beginning of its tenure even at the risk of losing its electorate mandate.

The recent interactions between the US and Pakistani authorities, however, suggest that Pakistan’s efforts for a substantial disbursements out of over $3.5 billion pending bills from Coalition Support Fund (CSF) may succeed to provide a cushion for the government to sail through the election period. Preparedness for looming military operation in Waziristan seems just an indication to that end, according to an official who sees at least some window of hope.

Majority of multilateral and bilateral lenders, however, feel that the government had missed an opportunity not to engage with the IMF for a future programme because all of them rely on the IMF’s professional scrutiny for providing financial assistance.

The non-recovery of over $800 million PTCL dues from Etisalat of UAE remains a question mark. The agreement with the Etisalat requires a simple third party arbitration process to recover outstanding dues but, for political reasons, the option had not been utilised for over almost half a decade now.

On the domestic front, a multi-pronged and severe energy crisis has been anticipated during winter months of December and January. Opposition parties would love to cash in on this crisis in their election campaigns.

Based on feedback from Indus River System Authority (IRSA) and provincial governments, the mandatory annual canal closure would start in the last week of December and continue until end of January. This would reduce hydropower production to around 1500mw against its generation capacity of about 7000mw and current average production of about 4500mw.

Almost during the same time, the gas demand for domestic sector for heating purpose is anticipated to go beyond 1.2 billion cubic feet per day, creating a net gap of over 1.8 BCFD between gas demand and supply. Punjab alone is estimated to face over 1 BCFD of gas shortage and worst hit by electricity and gas problem. On the driving seat, the PML-N would try to draw extra political mileage by taking the industrial workers and consumers to the streets.

As a consequence, the government and the consumers would have to face a double blow because not only the hydropower generation would drastically come down but also there would be no gas to compensate for the hydropower loss. Already more than 1200mw of electricity generation capacity was lying idle because of gas shortage.

More serious still, the shortage of natural gas and water would force the government to run most of the power plants on expensive furnace oil and diesel, resulting in three -fold increase in power generation cost and obviously the consumer tariff.

The energy cost of hydro and gas based power plants currently hovers at 30 paisa per unit and Rs3.5 per unit respectively compared with over Rs22 per unit cost of furnace oil and over Rs30 per unit cost of diesel based generation.

As a result, the government would have to make special arrangements for oil imports with additional disbursements from the federal budget or loans from the commercial banks to meet power requirements. Already the Pakistan State Oil faces difficulties in retiring foreign liabilities on account of fuel oil imports as its receivables stand in excess of Rs200 billion. According to an official estimate, the petroleum sector circular debt stood at Rs360 billion as of October 5 while power sector debt amounted to Rs400 billion.

This monetisation of fiscal deficit, said a senior official, would have serious implications for inflation as it would be a difficult political challenge for the government to increase electricity tariff ahead of elections.

The government has already released about Rs105 billion for power sector in almost 100 days of the current fiscal year against a full year budgeted allocation of Rs120 billion for tariff differential subsidy. With this pace of releases for the bleeding power sector, the annual tariff differential subsidy could go beyond Rs400 billion, resulting in further rise of fiscal deficit.