ISLAMABAD: Thanks primarily to the flawed policies, gross inefficiencies, and stark mismanagement of the economy on the part of the PTI-led government during the last 40 months of its rule, the menace of the toxic circular debt is now not limited to the power sector alone.
It has now started accumulating in other areas of economy too, ballooning to Rs4.5 trillion for power, gas, and commodities sector. Now oil industry has also joined the circular debt club because of Price Differential Claims (PDCs) the government has to pay to refineries and oil marketing companies (OMCs) for freezing the prices of petrol and diesel until the budget for next fiscal year. It is equivalent to above 8 percent of Gross Domestic Product (GDP) for this fiscal ending on June 30, 2022.
There have been quasi and non-quasi budget deficits. The quasi budget deficit is envisaged at 6.3 percent of GDP but revised estimates might raise it to around 6.8 to 7.1 percent of GDP for this fiscal year.
However, according to independent economists, the quasi budget deficit might escalate close to 8 percent of GDP. The non-quasi budget deficit will also be hovering around the same level of 8 percent of GDP, equivalent to absolute figures of Rs4.5 trillion, for FY2022.
“It’s a horrifying picture of the real economy as the overall monster of circular debt is now touching new heights,” said one top official.
Official data showed the cash-bleeding power sector’s circular debt, which was standing at Rs1,148 billion by the time the PTI government assumed power in 2018, surged Rs1,328 billion in the last 40 months to Rs2,476 billion by December 2021.
On average, the accumulation of this monster had gone up by over Rs33 billion on a monthly basis during the last 40 months.
The recently-approved Circular Debt Management Plan (CDMP), aimed at cutting down this megalith of a debt, faces implementation challenges because the incumbents seem reluctant to pay the political cost of fulfilling its commitment to hike electricity tariffs in line with the agreed conditions of the IMF (International Monetary Fund) programme.
The circular debt for gas sector has increased almost two-fold during the last three years ended on June 30, 2021. It went up to Rs650 billion against Rs350 billion in the fiscal year 2017-18. It stood at Rs350 billion at the end of the tenure of the PML-N-led regime (fiscal year 2017-18) and the major reasons were freezing of gas tariff and the then government’s inability to maintain Unaccounted for Gas (UFG) within the desired limits. However, the PTI-led regime increased the gas tariff but the UFG could not be curtailed effectively.
Moreover, the government owes approximately Rs1,000 billion to the commodities sector mainly because of operations undertaken to build up strategic reserves of wheat, sugar, cotton, etc. It stood at Rs903 billion on June 30, 2021, and is estimated to cross the Rs1,000 billion mark by the end of June 2022.
The government recently slashed down the prices of diesel and petrol by Rs10/litre and keeping existing international prices in view, it requires a subsidy of Rs55 billion on monthly basis. This is estimated to brings the amount of subsidy for four months to Rs220 billion. It had approved Rs136 billion as subsidy for reducing the prices of electricity by Rs5/unit.
Dr Khaqan Najeeb, former head of the Economic Reforms Unit (ERU) at Ministry of Finance told The News that whereas the power sector circular dominated the conversation, an equally serious situation had arisen in the gas and commodity sectors.
The buildups of circular debts are principally the result of flaws in the system covering policy inefficiencies, structural issues, and administrative fault-lines, all over-shadowed by political economy considerations, Dr Najeeb explained.
Circular debts were quasi-fiscal deficits and an indirect liability of the state, he said adding, for example, the circular debt or the accumulated stock of the power sector was the liability of the single power sector buyer CPPA (G) – the state. “These debts impact the entire power-gas/petroleum chain and weigh on the financial sector, budget, and real economy.”
The economist says that a good place to start is to realise there are 28 SOEs operating in the power/oil and gas sectors and a couple of others in the agriculture sector.
“Divestment must be a priority area along with a menu of fundamental market-creating reforms to make the financial hemorrhaging forever zero and the government must consider reducing its operational footprint which causes distortions, leakages and is less efficient, while regulators must be strengthened to monitor an efficient private sector and pass the cost of service tariffs to consumers.”
A targeted subsidy regime through a National Socio-Economic Registry covering about 33 million families must replace general subsidies in food and energy, he said.
Dr Najeeb added that setting prices of agriculture commodities should be left to the markets with the government maintaining strategic stocks where ever necessary. “This is all hard work but the good news is that these fundamental reforms are implementable over a course of 12-24 months,” he concluded.
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