NationalVOLUME 16 ISSUE # 06

Tackling the monster of circular debt

Pakistan’s debt profile has been worsening over time. The country’s public debt has gone up to 87 per cent of GDP at the end of 2019-20, up from about 72pc of GDP at the end of 2017-18. As we know, Pakistan direly needs International Monetary Fund (IMF) support to maintain healthy foreign inflows from bilateral and multilateral lenders to keep servicing over $78 billion foreign public debt.

In the overall context, the circular debt has become one of the key challenges to Pakistan’s financial and economic stability. The circular debt, commonly known as power sector payables, grew at an average rate of about Rs1.5b per day and Rs45b per month in 2019-20 to reach Rs2.15 trillion. The circular debt ballooned by Rs87b in July and August of the current fiscal year to reach almost Rs2.24tr. This means that the total payables of the power sector could go up to around Rs2.28tr at the end of the first quarter (July-September) of the current fiscal year.

Recently, the government has taken some steps to bridge financial gaps in gas and power sectors. A few weeks back, the Economic Coordination Committee (ECC) of the cabinet decided to increase revenue generation by about Rs180b in gas and power sectors. But reportedly no follow-up steps were taken. Last month, the federal cabinet was briefed about a circular debt reduction plan, based on the latest data that put the power sector payables at Rs2.24tr at the end of August, up from Rs1.16tr in June 2019 and Rs1.18tr in June 2018. The payables of Rs2.24tr included a little over Rs1tr parked in the Power Holding Company and about Rs1.23tr liabilities against power companies. Of this, the biggest chunk of Rs830b is payable to the Independent Power Producers (IPPs), followed by Rs220b to the Water and Power Development Authority (WAPDA), Rs163b to oil and gas companies and about Rs20b to the National Transmission and Despatch Company (NTDC). In 2019-20, total payables or the circular debt increased by Rs538b.

At the same time, the power sector’s receivables have also reached the level of Rs1.44tr by the end of August. Of the total, the biggest portion of about Rs690b is recoverable from private consumers. It is alarming given the fact that the power supply to small consumers is disconnected on non-payment of bills after 45 days. As much as Rs180b is outstanding against the K-Electric while the remaining Rs567b is payable by the public sector. In 2019-20, the receivables increased by Rs480b.

The authorities concerned presented to the government a series of book adjustments and recoveries over the next two years until 2022-23 — the last year of the Pakistan Tehreek-i-Insaf (PTI) government — but just Rs25-30b improvement through loss reduction. In the same context, the Power Division proposed about a Rs6 per unit increase in the consumer tariff and about Rs170b recovery from the K-Electric besides incentives for the industry and commerce to encourage higher consumption.

Last month, the Economic Coordination Committee (ECC) approved an increase of about 17pc in electricity tariff and 14pc in gas tariff to generate about Rs180b for power and gas companies. This will include about Rs130b additional revenue to power companies, about Rs22b to gas companies and about Rs27b additional sales tax to the Federal Board of Revenue.

The cabinet, in its meeting in the beginning of the last month, deferred the implementation of new power rates cleared by the Economic Coordination Committee. On the other hand, the IMF team is insisting on the implementation of the ECC decisions on energy prices as a condition for restarting the loan programme. After setting aside the subsidy element, the required increase in power tariff is around 32 paisa per unit for residential consumers with monthly consumption of up to 200 units. But other consumers will not feel the pinch of the increase given the fact that an earlier time-bound increase in the tariff came to an end on September 30 and will be replaced by a new charge.

The power sector has long been facing problems and it is time some drastic measures were taken to set the situation right. The circular debt is the biggest symptom of the illness. The government has been under pressure to introduce longstanding structural reforms in taxation and governance improvements in state-owned entities. But tough decisions needed in this connection have not been taken although the government is halfway through its five-year constitutional term.

It may be added here that the IMF has linked the revival of its programme to progress in reforms on the tax system leading to an increase in tax collection, an electricity and gas price adjustment mechanism along with price adjustments, a targeted subsidies regime and the restructuring of public-sector entities. All this is a tall order and it is doubtful that the government can undertake the essential reforms given the new challenge it is facing from the country’s combined opposition parties.