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August 22, 2013

The monster raises its ugly head again: circular debt is back

August 22, 2013

ISLAMABAD: Within weeks of the payment of Rs480 billion by the government to get rid of the haunting circular debt, it has now again started re-building and presently stands at around Rs62 billion.
Government sources in the power sector say that the present volume of the circular debt does not include the current payables. They warn that it is bound to rise unless some major concessions and initiatives are immediately withdrawn. These sources, however, said that because of certain steps already taken by the government, it would build up at a slower pace as compared to what we have seen in the past.
Senior spokesman of the Finance Ministry, however, when contacted argued that the present level of circular debt is part of the normal system. “There is nothing to worry about,” the Finance Ministry spokesman said.
The power sector sources, however, sounded worried about the re-emergence of the circular debt, and confided to The News that it was an uphill task to check the circular debt from re-building in the present conditions.
Key men in the power sector are really worried and insist that circular debt is bound to haunt the nation again despite the already taken initiatives till such time; a) the huge gap between the cost of the electricity and revenue is bridged, b) the average acceptable line losses are prudently worked out to increase the same from the existing 16.5 percent to the real 21 percent, c) making the system efficient to improve the recoveries from consumers to optimum level, d) the taxes on power should be collected on the basis of recoveries and not on the basis of billing, and e) there should be a timely determination of fuel price and their tariff.
The sources said that Nepra was being asked by the Ministry of Water and Power to prudently work out the acceptable line losses average in order to increase them from 16.5 percent to 21 percent. It is said that the average length of feeders in different parts is almost 110 kilometres

as against the required 50 kilometers. This improvement in the system, it is said, can’t be introduced overnight.
The power sector sources added that the imposition of taxes/GST on the basis of billing instead of recoveries also contributes towards re-building of the circular debt. Although, the Nawaz Sharif government had paid Rs480 billion to get rid of the haunting circular debt as part of its strategy to improve power generation and check loadshedding, it was even feared then that in case of the failure of the government strategy, the vicious circle of circular debt would re-emerge.
The government’s strategy contains different measures to increase power production, reduce line loses and power theft, shifting to low cost power production. In a meeting chaired by the prime minister in June this year, he was also warned that if things continued to proceed in the power sector as they were in the past, the circular debt would rise as high as Rs700 billion in a year.
Things would only improve if the government reduces power theft/line losses, ensures recoveries, reduces cost of power production and increases the electricity rates.It is said that the circular debt is actually the recurring losses of the power sector because of line losses/power theft/non recoveries and for the reason that the government was actually selling electricity for 9 cents per unit while it costs the government 15 cents.
In the last fiscal year, the circular debt was around Rs500 billion but was based on 12,000 MW of average generation of electricity. With the increase in power generation, as is claimed by the government, the circular debt is bound to grow further without corrective measures.
The impact of the recently launched campaign of the government to check power and gas theft, which according to the prime minister stands between Rs150 bn to Rs200 bn, is yet to be assessed.

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