The circular debt challenge for Pakistan’s government is growing larger and larger with every passing day. It seems like it is getting out of hands of government. They are unable to get a control on it. This can pose a very serious threat to the already unstable economy of Pakistan. Adding icing to the cake is the ongoing novel Covid-19 pandemic. But more importantly, it can cause serious damages to the power sector than the economy itself.
The Ministers of the ruling party continuously make high claims of keeping the power sector debt under control. Factually, these claims directly contradict with the statistics. The circular debts of power sector have almost doubled over the past two years to around 2.1 trillion PKR. The government keeps claiming every now and then that the quasi-fiscal debt stocks have been brought down from 38 billion PKR to around 10-12 billion PKR. In reality, the debt has increased to about 45 billion PKR per month from the previous financial year.
It is important to mention what circular debt actually is. Circular debt which mostly comes under the collective accountabilities of the power sector is basically the result of the ever lasting errors in the payments by some of the power consumers (which are connected to power distribution companies). The errors or defaults expand to the suppliers/producers of electricity like WAPDA, IPPs or nuclear power plants and generation companies. It also extends to fuel suppliers like Pakistan State Oil (PSO).
Circular debt also involves theft and operational and technical inefficiencies of the system. The circular debt is the huge flow of arrears and debt in the power sector. It not only damages the financial stability of companies and organizations related to power sector. But it also harms country’s economic stability.
Pakistan now needs the support of International Monetary Fund (IMF) to maintain a stable foreign inflow from bilateral and multilateral debt lenders. It helps to keep the servicing over $78 billion in foreign public debt. The loan program of IMF to Pakistan got suspended in January 2020, still remains postponed. Reason of postponement is the Pakistan’s public debt showing tilt upward from 72% at the end of 2017-18 to 87% of the GDP at the end of 2019-20.
The circular debt, also known as the power sector debt, is becoming a greater economic challenge for Pakistan. But an even bigger challenge is preparing a road map for resolving the crisis through substantial tariff increases and improvement of governance. It is due to the revival of the $6 billion IMF program, installed in February 2020. It still stays pending on the government of Pakistan from IMF.
The circular debt has grown exponentially during 2019-20 at an average of Rs 45 billion per month and now stands at a startling 2.15 trillion PKR. Government really needs to put a counter in the Secretariat to keep itself aware of the perpetually increasing circular debt
Looking at the latest statistics, the circular debt has increased by 87 billion PKR to reach at almost 2.24 trillion PKR in the months of July and August for the fiscal year 2020-21. The total debt of the power sector at the end of the first quarter (July-September) for the fiscal year 2020-21 is presumably around 2.28 trillion PKR.
The government needs the revival of the IMF loan program before the end of 2021. It would be taking important decisions in the next couple of weeks for this purpose. The unfurling of political events in the next few weeks will go hand in hand with government’s decisions and will affect these decisions too. Recently the government has been taking few steps to overcome the gaps in power sector. In the last week of September 2020, the Economic Coordination Committee (ECC) decided revenue of Rs 180 billion for power and gas generation but it was not supported by the Federal Cabinet.
The Special Assistant to Prime Minister Shahzad Qasim on 29th September briefed about the circular debt reduction plan. Out of the total Rs 2.24 trillion circular debts, Rs 1 trillion are parked in Power Holding Company. 830 billion PKR is payable to Independent Power Producers (IPPs). The power sector receivables have also increased about 144 trillion PKR by August 2020.
The biggest chunk of about 690 billion PKR is recoverable from the private consumers. As much as 180 billion PKR is outstanding against K-Electric whereas around 567 billion PKR is payable by the private power sector. Shahzad Qasim also presented certain recovery programs for 2022-23, which would be the terminal year of the current government.
The ECC approved an increase of approximately 17% in the electricity tariff and 14% in gas taxes. It can help to generate 180 billion PKR for gas and power companies. This will include almost 180 billion PKR for power companies.
The federal Cabinet met on 6th October and adjourned the implementation of new power rates. They were implemented by ECC in late September. IMF is insisting on the implementation of the ECC decisions of as the first step towards revival of their loan program.
Previously, the IMF had conditionalized the revival of its loan program based on the progress in tax reforms. A clear electricity and gas price adjustment plan, a road map to targeted subsidies and the restructuring of public-sector entities.
Most recently, the formation of the multi-party alliance by the Opposition over the constantly rising inflation and an unstable economy is going to give a very hard time to the government for making decisions. It will be very challenging for the government to make crucial decisions related to the circular debts and the revival of IMF loan program under the rising and a united Opposition.
However, it is surprising to see the government and its ministers to blame the previous governments for the current debts. The current government has not carried out an outstanding job with the economy itself. The public is constantly raising its voices against a destabilized economy.
Government is now expected to come up with a proper managerial program for reforming the circular debts. Otherwise the Tabdeeli chants made by the PTI’s premiere throughout his campaigns would go down in history as a failure because of his inability to deal with the country’s economy.
Author is doing BS in International Relation from Lahore College for Women University. She is a freelance writer. Previously worked with The Frontier Post, Dawn and Express Tribune.