Circular debt: PTI govt running around in circles
25 Feb 2021
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EDITORIAL: The government has informed the standing committee on finance that energy sector’s circular debt is likely to increase by 436 billion rupees by the end of the ongoing fiscal year taking the total to 2.6 trillion rupees. This claim was challenged by the chairman of the committee who contended that as per the documents provided to the committee, the circular debt is projected to rise by 500 billion rupees by end June 2021, prompting the Additional Secretary Power to clarify that subsequent to an adjustment of 64 billion rupees and the recent increase in tariffs the circular debt projection has been revised downward from 2.8 trillion rupees to 2.6 trillion rupees. This, he further claimed, reflected a decline in the rate of rise from the first half of the current year when circular debt rose from 2.1 trillion rupees by end June 2021 to 2.3 trillion rupees by end December 2021.
The government official acknowledged that the debt parked inside PHPL, a mechanism established during the tenure of Shaukat Tarin as the Finance Minister when the country was on a Stand-By Arrangement with the International Monetary Fund, has been converted into the country’s total debt, as recommended by multilaterals - a decision with implications on total debt servicing and consequently on the budget deficit which was already unsustainable at the time Imran Khan-led Pakistan Tehrik-e-Insaf (PTI) came to power. An increasing budget deficit, in turn, impacts on inflation that remains resistant to mitigating policy/administrative measures.
The initial objective of parking the debt inside PHPL was to clear it slowly through higher tariffs – an objective that remains unfulfilled to this day with the consumers paying ever-rising tariffs to: (i) meet the interest payments of rising sectoral borrowing due to sectoral inefficiencies; and (ii) generate government revenue through the levy of taxes on electricity. Equally disturbing is the fact that the government recently sought the power to levy surcharges which is being resisted by the relevant standing committee members.
The Additional Secretary further identified the components of circular debt as follows: (i) 3.5 percent technical and distribution losses over and above those allowed by National Electric Power Regulatory Authority (Nepra) which contribute 17 billion rupees to circular debt for each percentage differential. In other words, there is an addition of 59.5 billion rupees each year under this head; (ii) inefficiencies in distribution companies contributing 170 billion rupees each year; (iii) 100 billion rupees non-payment by K-Electric; and (iv) the need for higher subsidies than budgeted and in the current year alone an additional amount of 197 billion rupees is required to provide relief to the poor.
The foregoing indicates sustained poor performance of the sector, a trend which has worsened since August 2018 as the circular debt has risen from 1.2 trillion rupees to 2.3 trillion rupees today projected to rise to 2.6 trillion rupees by end June 2021 – a historic rise in less than three years of 116 percent. And this is in spite of the massive rise in tariffs – a policy that unfortunately was also followed by the previous administrations.
Sadly, the foregoing does not provide any comfort level to the general public subjected to over 6 rupee per unit increase in three concurrent announcements since January 2021. Notwithstanding lower energy consumption in the winter months, unlike in the West upcountry areas rely on gas for heating, as well as reduced demand due to the pandemic the average householder has witnessed a significant rise in the electricity bill payable for January with concern being voiced as to the ability to clear bills in summer when consumption rises. There is evidence to suggest that however poor the performance was during previous administrations it has not improved one iota since the Khan administration took over power; and has in effect deteriorated since. Clearly, the beneficial impact of the deal with Independent Power Producers (IPPs) has neither filtered onto the sector nor to the consumers and the projection of savings of around 800 billion rupees over the next 20 years appears to be too much into the future to generate a comfort level today. One would hope that the circular debt is slashed without diverting it to national debt.
Copyright Business Recorder, 2021
EDITORIAL: The government has informed the standing committee on finance that energy sector’s circular debt is...
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