The dilemma of circular debt and energy crisis in Pakistan

By M. S. Qazi

The circular debt and power crisis are interlinked issues that cannot be resolved unless all the stakeholders, consumers, power generation and distribution companies and the government decide to adamantly resolve them in a comprehensive manner. The problem of inter-corporate circular debt has turned out to be a chronic one. It has gravely affected the power generation capacity available in the country. It arises because a number of public sector commercial entities such as Pakistan Railways, Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM) and provincial and federal government departments are in default on payment of huge electricity bills running into billions of rupees.

Pakistan has a total installed capacity of roughly 18,500 MW. Around two-third, 12,500 MW (against a minimum demand of 12,500 MW) is generated from furnace oil and natural gas, provided electricity generating units based on them operate to their full capacity. Around 6,500 MW of hydro-electricity can be available provided the hydro-electricity generating units work to their full potential. Presently around one-third hydro-electricity is generated because of shortage of water in dams. Oil and gas units cannot generate electric power according to their capability because of a shortage of oil and gas, which is primarily due to circular debt. The cost of electricity generated from oil and gas is high because of high cost of raw materials. Currently, there is a shortage of 4,500 MW against a minimum requirement of almost 125,000 MW. These figures keep on changing due to changes in demand.

Pakistan Electric Power Company (Pepco) and Pakistan State Oil (PSO), the two state-run organisations and Independent Power Producers (IPPs) are big stakeholders in the inter-corporate circular debt. The amount keeps on fluctuating from Rs100 billion to more than Rs250 billion (at one stage it increased to more than Rs400 billion mark) as the government keeps addressing the issue on an ad hoc basis from time to time. According to an estimate, Pepco’s daily buildup of arrears is almost Rs300 million because of a wide gap between payments for power supplied and cost received.

PSO, the largest supplier of furnace oil to the power sector, till mid-March had more than Rs100 billion outstanding to be paid to it by the private and public sectors’ power producing companies. In return, it is to pay Rs95 billion to oil refineries in the country and to foreign suppliers. The situation is complicated for PSO. It is not being paid on time for furnace oil supplies to power producers with the result that it runs the risk of delaying payments, particularly to foreign suppliers. Prolonged delays can affect PSO’s contracts with foreign suppliers and in the international oil market. It therefore, becomes imperative for the government to seek a comprehensive solution of the circular debt.

The government instead of addressing the root cause of circular debt, that is working out a mechanism to curtail accumulation of the debt or being firm with the defaulters has been resorting to ad hoc measures to resolve the debt. These measures include borrowing billions of rupees from commercial banks through various instruments to make partial payments of the debt to reduce it to a manageable limit. But, generally the default amount is more than the government’s capacity to pay at a given time with the result that the circular debt starts building up. According to the ministry of finance, the government last year released Rs190 billion to power and petroleum companies and picked up another Rs290 billion of liabilities through creation of the power sector debt holding company, however, the circular debt that had increased to Rs80.0 billion in September 2009 kept increasing to more than Rs250 billion by end of January. Over a period of time the government has run short of the options available to it to confront the circular debt issue. It has squeezed the banking sector to the hilt last year and borrowed Rs157 billion from it at an interest rate of 15.0 per cent by issuing term finance certificates (TFCs) in two installments of Rs72 billion and Rs85 billion. It could not use the option of borrowing from the State Bank of Pakistan because of the IMF conditionality.

The government is once again attempting to reduce the circular debt of more than Rs150 billion by issuing Rs100 billion Sukuk bonds in May with a cut-off yield of almost 12.7 per cent as is on Pakistan Investment Bonds. Religious minded people and Islamic banks are its target because according to the government’s estimate they have a cash liquidity of Rs150.0 billion. It is estimated that Islamic banks have a liquidity of almost Rs50.0 billion. Their lending ratio is low compared to the deposit ratio. It is an ad hoc measure and is unlikely to address the issue of circular debt on a permanent basis. Government’s domestic debt liabilities have increased because of this quasi-fiscal measure. It is feared that the government may not be in a position to meet the revised fiscal deficit target of 5.2 per cent of GDP. The necessity of revamping the system of collecting power bills within time from the consumers of all sorts is too obvious to be stressed. The government should take the following measures in this respect:

(a) Outstanding bills of consumers of all sorts should be realised within four months through monthly installments. Outstanding bills of public sector enterprises, provincial and federal governments, should be deducted at source. Henceforth, payment of bills should not be withheld by them on one pretext or the other.

(b) Austerity measures decided by the federal government should be implemented in letter and spirit to reduce the over consumption of electricity.

(c) Government should take measures to reduce the cost of furnace oil for production of comparatively less costly electricity as an incentive for timely payment of bills by big consumers.

(d)Theft of electricity and line losses should be reduced from 40.0 per cent to a lower percentage.

(e)Government needs to review its policy of paying-off the circular debt by floating TFCs that create liquidity crunch for commercial banks. Instead, the power sector should be made self-reliant and self-sustaining.

(f)The three major stakeholders in the power sector; PSO, Pepco and IPPs should make genuine efforts to keep their accounts free of outstanding bills as much as possible.

Resolving the problems of outstanding bills is the key to end the circular debt issue, and to generate maximum power generation to end electricity outages that have adversely affected normal life and all sectors of the economy.

Source: The News

2 Comments

  1. osman

    One of the major cause of this problem is that Steel mill, PIA, Railway and other such state owned huge organizations should be made profitable so that they pay their bills themselve rather than govt borrowoing loan for this purpose. These giants are such a huge burdon on this nation whereas they can be a huge contributor if run properly.

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