Wednesday February 21, 2024

Rs301bn over four months takes circular debt to Rs2.61tr

Debt has surged at alarming rate in early months of new financial year, surpassing pace set in previous fiscal period

December 07, 2023
A money trader counts Rs500 bank currency notes at a money exchanger. — AFP/File
A money trader counts Rs500 bank currency notes at a money exchanger. — AFP/File

ISLAMABAD: The much-hyped drive against power theft, championed by the caretaker government, seems to have fallen short of its intended impact, as evidenced by the unabated growth of circular debt.

The debt has surged at an alarming rate in the early months of the new financial year, surpassing the pace set in the previous fiscal period.

The power sector’s circular debt stock has reached a staggering amount of Rs2.611 trillion by the end of October 2023 from Rs2.31 billion total stock recorded at the end of the fiscal year 2022-23 in June.

This indicates that the debt was amassed by 13 percent (or Rs301 billion) in just four months (July to October 2023), according to a report by the Ministry of Energy.

A cursory look at the data indicates that each month, a whopping Rs75.25 billion ($265 billion) was accumulated as debt. Notably, in the same four-month period of the last fiscal, the increase was Rs249 billion, even though there was no anti-theft power drive.

This unsettling trend serves as a stark indicator of escalating inefficiencies plaguing the energy system, with glaring issues evident in the realms of power generation, distribution and the dismal state of dues collections.

Even though the government raised electricity prices in July 2022 due to pressure from the International Monetary Fund (IMF), the circular debt issue in power companies continues. Despite a significant increase of Rs7.9 per unit, the problem persists because the fundamental issues in the sector were not addressed. This puts a heavy financial burden on loyal power consumers, costing them billions of rupees every month.

On average, the government has included over Rs20 per unit in the base tariff being charged from consumers to address and fund the mounting debt. Despite these implemented measures, the debt stock has stubbornly persisted at the same level as a year ago, even in the face of payments made to power generators.

Meanwhile, payables to power producers surged by Rs316 billion to Rs1.75 trillion during these four months from Rs1.434 trillion at the end of FY23. The state-owned generation companies (GENCOs) saw their payables to fuel suppliers down from Rs111 billion in FY23 to Rs96 billion by the end of October 2023. However, the amount parked in Power Holding Limited (PHL) was unchanged at Rs765 billion.

The financial impact of distribution companies’ (DISCOs) inefficiencies has become substantial in the power sector, primarily attributed to their high losses and low bill recoveries. These issues in power transmission and distribution hinder the sustainable delivery of energy services, leading to increased energy prices and heightened business costs.

Discos’ losses and inefficiency stood at Rs77 billion during July-October 2023-24 as compared to Rs65 billion in the same period of 2022-23, showing an addition of Rs16 billion in total circular debt stock.

Discos’ under recoveries reached Rs165 billion during the first four months of 2023-24 as compared to Rs61 billion during the corresponding period of 2022-23; however, their cumulative under recoveries stood at Rs236 billion at the end of FY23. Other adjustments (prior year recovery, etc.) were Rs147 billion during July-October, 2023-24, against Rs254 billion in July-October 2022-23.

Key factors contributing to the significant surge in circular debt include problems associated with K-Electric (KE), issues in AJ&K, release of subsidies, delays in implementation of Quarterly Tariff Adjustments (QTA), higher interest payments and fluctuations in the rupee-dollar exchange rate.

Notably, as of October 2023, Rs389 billion remains outstanding from KE, pending resolution due to a subsidy dispute between the power utility company and the federal government.

During July-Oct 2023-24, the amount of budgeted but unreleased subsidies was Rs8 billion. This is in stark contrast to the corresponding period in 2022-23 when the figure stood at Rs74 billion. The substantial reduction in released subsidies further exacerbates the challenges in managing and mitigating the expanding circular debt crisis.

Breaking down the additions to circular debt, IPPs’ interest charges on delayed payments of PHL and IPPs were recorded at Rs45 billion in four months of the current fiscal year against Rs54 billion in the same period of 2022-23. The amount of IPPs interest charges on delayed payments was Rs143 billion during the entire fiscal year 2022-23.

Furthermore, Rs110 billion in the circular debt is due to delays in the recovery of generation costs through quarterly and monthly fuel charge adjustments. Last year in the same period, it was at Rs103 billion and Rs250 billion at the end of FY2023.

The ongoing dispute over subsidies between the government and K-Electric (KE) is one of several factors contributing to the mounting debt. As of October 2023, a substantial Rs389 billion is receivables from K-Electric, exacerbating the revolving debt situation. The resolution of this conflict is crucial to stabilizing the financial health of the energy sector.

Notably, as of June 2023, this amount was Rs346 billion, and after non-payment of Rs43 billion in July-October 2023, the total outstanding amount reached Rs389 billion. Payables to power producers also increased by Rs5 billion due to withdrawals by FBR in April 2023.