Circular debt and Sukuk

With circular debt surpassing the Rs1.8 trillion mark and going on to reach two trillion rupees soon, the PTI-led government is reported to have plans to launch Sukuk-II to raise another Rs200 billion. A consortium of local banks is reportedly ready to pledge assets of distribution companies (Discos) and generation companies (Gencos) against loans. Electricity consumers will service the new facility by paying surcharge in tariff. But before we discuss the merits and demerits of Sukuks, it is better to be clear about the circular debt itself. Circular debt is part of the public debt that Pakistan accumulates with unpaid government subsidies. With these ever-increasing unpaid bills of subsidies, the distribution companies are unable to pay independent power producers. These Gencos in turn stack up their own liabilities by not being able to pay to fuel providers. In this manner, the current level of total circular debts is approaching two trillion rupees in the near future. Now, to counter this challenge of mounting circular debt, the government comes up with a financial mechanism fancifully called Sukuk, which is similar to a bond in Western financial terminology.

It is supposed to be compliant with Islamic religious laws and gives a way out by not using the traditional Western interest-paying bond structure. A Sukuk – a kind of a certificate – is sold to an investor group and with the proceeds an asset is purchased in which the investor group becomes a partial owner. The current government had unveiled plan to issue the Sukuk in March 2019 when it raised Rs200 billion through its first ‘Pakistan Energy Sukuk-I’, which was oversubscribed by 1.5 times, thanks to an active participation from Islamic banks having no dearth of liquidity. Then in October 2019, Sukuk-I got listed at the Pakistan Stock Exchange (PSX) and became the largest Sukuk ever listed at a stock exchange in Pakistan. In December 2019, the news appeared that to support its budgetary position the government was to raise up to Rs700 billion through domestic Ijara Sukuk against the land of the Jinnah International Airport, Karachi for which three banks had already been selected as transaction advisers. And now there is a discussion about a new Sukuk-II.

All this raises serious questions, especially when the government has added over Rs560 billion to the circular debt and has missed the IMF’s debt-accumulation reduction target for the second time. It appears that the government has been focusing only on using their own assets against the loans. This tendency will be a disaster in the long run, though it may give temporary relief to the government. The government has neither been able to improve the revenue thorough agriculture or industrial sectors, nor has it been able to explore and implement any long-term plans for reducing and ultimately eliminating circular debt. This financial adventurism must stop as public assets are not a property of the government and they must not be used to compensate for the government’s inability to raise funds from other sources.