Spiralling circular debt

December 02, 2020

The spiralling circular debt has become a headache for the government and is a ticking time bomb that can explode any time, destroying the already disturbed economic growth cycle.Circular debt is a...

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The spiralling circular debt has become a headache for the government and is a ticking time bomb that can explode any time, destroying the already disturbed economic growth cycle.

Circular debt is a chain of creditors and debtors that circles back onto itself, where the final creditor is in debt to the first debtor in the chain. There is a vicious cycle of unpaid bills in the power sector, right from power generation to its distribution to recovery and theft. It revolves around fuel supply companies to the distribution network and ultimately ends up at the doorsteps of consumers. Since energy prices are not stable, neither is circular debt and cost of power generation and of doing business despite the fact that the government has been trying its best to curtail losses by checking power theft as well as recovering unpaid bills.

It is reported that circular debt was recorded at Rs288 billion in the first half of 2019, while another Rs198 billion in the second half of the previous year. The first six months of the current year accumulated circular debt of Rs243 billion and expected to rise to about Rs294 billion in the second half of the year. This is despite the fact that the government revised the power tariff five times to cover the gap of recovery for payments to power supplying companies. Circular debt has now accumulated to a whopping Rs2300 billion – out of which Rs1139 billion has been added during the present government’s tenure.

A circular debt reduction strategy has always been a priority of the government. But the situation is getting grim, with the power sector payables standing at Rs2.24 trillion at the end of August this year compared to Rs1.18 trillion by the end of June, 2018 and Rs1.16 trillion by the end of June, 2019. Out of these payables, the biggest amount of Rs830 billion relates to IPPs along with about Rs220 billion to Wapda, Rs163 billion to oil and gas companies, Rs20 billion to the National Transmission and Despatch Company (NTDC).

The total payables or circular debt increased by about Rs538 billion in 2019-20. The power sector’s receivables during this period ending August, 2020 stood at Rs1.44 trillion out of which Rs690 billion are outstanding against private consumers along with Rs180 billion from K-Electric and Rs567 billion from the public sector. These receivables increased by Rs480 billion in 2019-20.

Now, one proposal is to increase the power tariff. This is a very hard decision, as the government is already under pressure due to inflation and price hike and the opposition is protesting. There is pressure by the IMF to implement this proposal along with structural reforms in taxation as well as improvements in the governance of Public Sector Enterprises (PSEs) including privatization of loss-making entities. The IMF has made it clear to the government team that its stalled programme of Extended Fund Facility (EFF) can only be revived subject to power sector price adjustment, improvement in recovery and tax collection, roadmap for targeted subsidies and restructuring of state-owned entities.

There are a host of challenges faced by the energy sector in Pakistan, consequently leading to a huge circular debt such as the pathetic state of affairs of governance in distribution companies, surplus supplies related capacity payments owing to stagnant demands and delayed decisions to produce electricity from cheaper fuels. Low recovery of unpaid bills accompanied by high power theft has mainly contributed to accumulation of circular debt resulting in difficulties of necessary working capital required to companies involved in power production, distribution and transmission.

Demand has been stagnant for quite some time now but there has been continuous addition of new plants of power production, burdening an already crippled economy with ever-growing capacity payments now standing at Rs1 trillion. One can imagine highly inefficient distribution companies like Quesco and Pesco, which are contributing about 60 percent to circular debt which is estimated to rise to the tune of Rs4 trillion by 2025, if it grows at the present pace. This ever-growing circular debt is attributable, besides other factors, to the inefficiencies of nine distribution companies excluding K-Electric that are allowed to incur 16 percent line losses in addition but not limited to 12 percent losses including theft furthering the woes of 40 percent irrecoverable bills. There is an urgent need to address the issue of circular debt but the most pinching question is: how? Recovery of bills is one of the most formidable challenges. One of the suggestions may be to create stakes of the provinces by giving ownership of distribution companies as part of partnership in corporate entities who would, in return, be responsible for law enforcement as part of the campaign to recover unpaid bills as well as controlling theft in their respective provinces. At present, there is a gap in coordination as well as law enforcement in and between the federal and provincial governments so far as recovery of unpaid bills and theft are concerned; distribution companies are owned by the federal government while law enforcement is a provincial subject. Recovery of unpaid bills can also be linked with revenue transfers through NFC Award.

Excess power production in the face of almost stagnant demand is another challenge so there is a need to create demand for excess production for which payments are being made as per contracts initially signed by the government with IPPs. Right now, the government is under negotiations with IPPs for revision of contracts to address this issue. Ironically, growth of demand is only four percent if calculated as a compound annual growth rate compared to a meagre GDP growth rate of about one to two percent. The high cost of power generation is another challenge for the government that is adding to the circular debt.

There is an urgent need to shift focus to renewable energy like solar, wind and local coal to get rid of heavy imports of fossil fuels like furnace oil, RLNG and imported coal. We also need investment in transmission infrastructure, and in having dashboards in all offices including the PM’s office reflecting the daily figures of additional debt to monitor it.

Circular debt is badly affecting the economy, creating budgetary constraints. The government needs to act now, lest we lose all options and fall into the grip of stagflation.

The writer is an economist.

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