Challenging circular debt

Circular debt in the power sector has been a problem in Pakistan year after year and goes back decades. The federal government has now taken a new step to try and prevent this debt and to bring it down, both under pressure from the IMF and from IPPs which need LNG to produce their own electricity. The government has said that it will recover Rs2400 billion in circular debt by compelling the industrial sector to purchase electricity from the national grid rather than from their own ‘captured plants’, which they were encouraged and indeed forced to set up some years ago. This has brought an outcry from the industry, which complains that it was not consulted about the matter and that as a result of the decision, which comes into force on February 1 for the non-export sector, and from March 1 for the export sector, it will be left behind Bangladesh and India in terms of exports at a time when it was just beginning to make a recovery. This is especially true for the textile sector, which has expressed particular outrage.

It is obviously best to get things done by reaching a consensus and through the process of negotiation and discussion. The track record of this government shows that this has rarely happened. It is true circular debt is a huge problem, with much of the LNG going to the domestic sector and according to government experts not enough left to turn the government's efficient LNG plants, which could produce electricity at less expensive rates. Despite the increase of Rs 1.95 per unit for electricity, the circular debt is still likely to plague the sector. For this purpose, the industrial sector is now being brought into the frame and asked to purchase electricity from the grid rather than manufacture its own. Already several problems have come up. In the first place, industrialists say there is not enough capacity in the grid to provide the power it needs to meet its production costs. The government denies this and says that level of production will be created.

As far as K-Electric's inability to generate enough electricity to meet the needs of industrialists in the south, the government has said new infrastructure is being set up by K-Electric which will come into operation in stages, beginning in the summer and completing by the winter. We certainly hope this can happen. In the past, projects in the pipeline have not always reached the end that was planned and as a result there has been massive confusion and suffering. At present, the government struggles to recover Rs74 billion for the LNG provided to the domestic sector of Punjab and Khyber Pakhtunkhwa. These struggles must be resolved and a way found to manage circular debt more efficiently. However, we must also remember that exports may be our only hope of escaping our current economic crisis. If circular debt can be lowered by forcing industries to buy electricity from the grid, things would go well. The rates at which the power would be purchased have also been adjusted slightly at the demands of the industrialists. However, those who run the sector point out that SMEs and large textile mills will both suffer. Whether this is the right solution, only time will tell. But we can only hope it is, so that no further damage is caused to our economy and exports can increase in the country as is so badly required.