Circular debt swells Rs260bln in 10 months

ISLAMABAD: Circular debt swelled by Rs260 billion during the first 10 months of the current fiscal year of 2021/22, although the government controlled the buildup during the period, officials said on Tuesday.

The power division submitted the circular debt report for the month of April 2021 to a meeting of the cabinet committee on energy held under the chairmanship of Minister for Planning, Development, and Special Initiatives Asad Umar.

It was informed that the circular debt buildup during July and April was Rs260 billion which was considerably lower than the Rs449 billion buildup, which reflected an improvement of Rs189 billion over the last year.

The committee appreciated the improvement in circular debt management and directed that power division should work with finance division to make further improvements in the system.

The government had rolled out a comprehensive circular debt reduction program at the start of the last year to improve viability of the power sector and arrest the accumulation of arrears. Accordingly, power tariffs were increased in the initial months of FY20 to pass on the impact of rising capacity charges and fuel price adjustments. This had helped improve gross revenues in this sector. In contrast, the growth in intermediate consumption was modest due to a shift in the fuel mix in favor of cheaper sources, such as hydel and coal.

“Pricing and governance problems in the power sector need to be addressed as these not only represent significant quasi-fiscal risk, but have also dented the competitiveness of the economy,” the State Bank of Pakistan (SBP) said in a report.

The energy sector strategy included a circular debt reduction plan, adopting amendments in the National Electric Power Regulatory Authority act to ensure automaticity of tariff revisions and notifications, improving collections, and subsidy rightsizing. Infrastructure investment to reduce technical losses, anti-theft drives, and upward tariff adjustments during the early months of FY20, had helped arrest the growth in arrears.

“However, postponement of tariff adjustments for monthly fuel and quarterly capacity payments since January, and payment deferrals from March onwards, diminished these initial gains,” said the SBP. “While the implementation of these adjustments would help correct immediate payment shortfalls, the long-term solution to the pricing issues (especially with respect to capacity payments) is more likely to be influenced by how the prospective revisions in the power purchase agreements with the IPPs roll out. Furthermore, a substantive progress on the Disco’s governance, streamlining of tariff adjustments, and upgradation of transmission and distribution infrastructure, will remain key in improving the overall viability of the power sector.”

Petroleum division also apprised the committee of the progress on the establishment of new LNG terminals.