Managing Pakistan’s fiscal and energy sector debt crisis 2


By M. Sharif

National economy is in dire straits primarily because of two pressing problems of fiscal deficit and acute shortage of energy and its rising cost for domestic and commercial consumers along with huge corporate debt of energy sector. State of the economic indicators such as forex reserves, inflation, public debt and revenue collection is not very encouraging. Consumer financing that supported economic growth for around 2-3 years has also declined. Rupee has depreciated by around 20.0% during this year. Key sectors of the economy that is agriculture and industrial sectors are in doldrums. In the midst of such an economic scenario, retrieving economy is a real challenging task for any team of economic managers. Economy has a few indirect support elements such as high inflow of remittances and support of US administration and multi-lateral organizations. It has a few basic strengths that include a sound base for agriculture and industrial sector, vibrant financial sector and huge human resource potential. In case prudent fiscal, monetary, agriculture, industrial and human resource development policies are executed it should be possible to overcome the crisis faced by the economy.

 

Energy cum circular debt crisis

The country is facing worst energy crisis that is affecting economy negatively in many subtle ways. This is happening despite availability of sufficient water in dams, decrease in oil prices in global market and the facility of importing oil worth $6.0bn provided by Saudi Arabia on deferred payments. The real cause lies somewhere else: fiscal crisis faced by energy sector whose circular debt has shot up to Rs400.0bn primarily because of non-payment of outstanding dues by public sector consumers of different sorts that includes provincial and federal governments departments.

Pakistan currently generates electricity from hydro-electric dams, thermal units that burn natural gas and furnace oil and nuclear power plants. Electricity generated from the latter is meager, around a few hundred mws. Energy sector involves four different sorts of stakeholders: public sector company, PEPCO (Pakistan Electric Power Company) and its allied companies, private sector power companies like KESCO (Karachi Electric Supply Company), fuel supply company, PSO and corporate sector IPPs (Independent Power Producers). IPPs are to be paid regularly for electricity they produce and sell to public sector companies distribution net work to meet the cost of furnace oil that they use to generate electricity and to meet overhead expenses.

 In fact, energy sector money matters are “circular” in structure. IPPs generate power with sovereign guarantees given by the government about purchasing power and making payment to them  by the public sector power companies who purchase power from them for onward distribution to different sort of consumers. Fuel supply companies are to supply fuel to IPPs but they too have to be paid their dues on time to enable them to keep supply line in tact. The consumers are billed to make payments for the energy they consume. In case the circle involving the four stakeholders runs efficiently, there should be absolutely no difficulty to provide electricity to all sorts of consumers. As far as cost of electricity per unit is concerned it has to be compatible with the cost of inputs and consumers have to bear it.

Energy crisis have persisted because of three fault lines. One, the cost of furnace oil has surged up and government in the past remained reluctant to pass it on to the consumers for reasons that were primarily politically expeditious. Consequently, the issue of petroleum price differential has persisted between the government, fuel supply companies and IPPs. Presently, PDCs (Petroleum Differential Claims) are stated to be around Rs84.0bn. They are to be solved in one way or the other. IPPs recently threatened to stop producing electricity and invoke sovereign debt guarantee clause for payment of outstanding dues.

According to latest information, Pepco and its allied companies are to recover Rs155.0bn from public sector consumers and Kesco. Fatas are to pay Rs 75.0bn, provincial governments are to pay Rs11.0bn and Kesco is to pay Rs 60.0bn. Defence organizations and the federal government are to pay Rs 8.0bn and Rs 1.5bn respectively. Unless these organizations are made to make the outstanding dues to Pepco, it can’t run the show by purchasing electricity from IPPs. They, too, can’t afford to keep on selling electricity to Pepco indefinitely.

It was the threat given by IPPs to call government guarantees that things started moving. It is reported that Pepco and its allied companies have paid Rs 30.0bn during past 15days to IPPs. Pepco recovered on the average Rs 1.0bn per day from consumers and entire amount was paid to IPPs. IPPs have a capacity of generating 6115mw but were generating 3470MW primarily because of lack of funds that caused shortage of fuel. The government has moved fast to contain load shedding during the holy month of Ramazan and asked the concerned organizations to increase electricity production by 1370mw to avoid load shedding during iftar and sehri. There is some improvement on that account but in certain areas where electricity loss is around 33.0 per cent, there is acute shortage of electricity.

Public sector organizations Pepco and Wapda have thermal energy power plants with substantial capacities. Wapda has a capacity of 4829 mw but is producing around 2000 mw because of its inability to purchase fuel to run the thermal plants. The same is true of Pepco. In order to utilize availability of capacity to maximum, it is essential that fiscal management of energy sector should be improved on priority basis to overcome shortage of electricity that is causing a lot inconvenience to domestic and commercial consumers. Some of the measures being initiated by the government to streamline fiscal management of energy sector are steps in the right direction. They include: deduction of power dues at source of the government departments, rationalization of cost of producing per unit of electricity and payment of cost of production by the consumers. But, it is equally important that line and theft losses that are as high as 33.0 per cent in certain areas should be reduced and indiscrete use of electricity by higher civil and military bureaucracy be curtailed.

 

Fiscal crisis

Fiscal management is on the edge of precipice because of political uncertainty that would be, hopefully, coming to an end after election of the president, somewhat of indifferent attitude of the government to address fiscal issues faced by economy on priority basis and resource crunch that it faces because of huge fiscal burden on its plate. Contributory factors are huge debt servicing, defense and security expenditure, development expenditure and recurring expenditure of running the government. Revenue collection despite the fact that it crossed one trillion rupee mark is hardly compatible with fiscal demands. The government has no option except to go either for contracting debt from domestic and international donors and financial market or asking the SBP to keep printing paper money that fuels inflation that has already hit 24.5 per cent mark. Both the measures are uncomfortable for the government and detrimental to economic stability and meaningful growth.

Fiscal issues have further compounded because of high demand side of economy particularly of consumer goods that the government has tried to curtail by increasing import duty on 350 items. It is also curtailing development expenditure but the effort to curtail expenditure of running the government that has a lot of scope for reduction is hardly visible. Fiscal and structural distortions in the economy that have remained unaddressed over the years, have resulted in loss of forex reserves by more than $7.0bn during last ten months and are presently less than $9.0bn, Pak rupee has depreciated by more than 20.0 per cent  during current year with the result that foreign debt burden and cost of living have increased tremendously. Supply side of economy particularly of essential items like atta, milk, vegetables is weak because of hoarding and lust for profit making and inadequate policy for agriculture sector. The provincial governments must go all out to improve supply side of essential items.

Financial crunch is the real issue faced by the government. It can’t go to international financial market to sell bonds because expenditure on bonds already contracted has tripled since October last year and credibility of the country in international financial market is at the lowest ebb. Financial market in the country is quite volatile. The SBP has assured the financial market that forex reserves would soon be improved by giving impetus to privatization and seeking help from the donor countries. It is quite likely that the government might seek credit from the IMF. Treading either of the path would be time consuming and much would depend on political stability in the country and government’s initiative to address fiscal issues and impetus given to economy to have higher economic growth.

 

Conclusion

Past five months have practically gone unused to address fiscal issues faced by the energy sector and economy. Had some measures been initiated to address them, the downward trend could have been curtailed. Some of the measures now initiated by the government are in positive direction and should help in reversing the ongoing negative trends.  Energy crisis are addressable provided the government makes all out effort to increase production capacity of electricity and reduces its circular debt in the shortest possible time.

Source: The News, 8/9/2008


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