Circular issues

The grand total of the government’s contribution to managing the crippling energy sector circular debt over the last eight months comes to mere fretting over the matter. This is why the news that Prime Minister Shehbaz Sharif is determined to tackle the thorny issue without putting any additional burden on the consumers of gas and electricity, which should have been music to our ears, sounds more like a euphemism for continued inaction on the part of the government. Given how energy security underpins the country’s modern lifestyle, industrial and agricultural productivity, and indeed the national security itself, this is a recipe for disaster. Circular debt represents the net unfunded outstanding liabilities of the power distribution companies (DISCOs) to the Central Power Purchasing Authority-Guarantee (CPPA-G). Inevitably, these liabilities cascade into delayed settlement of obligations by the CPPA-G to the power generation companies (GENCOs), necessitating borrowing by Power Holding Private Limited (PHPL) to settle the CPPA-G’s liabilities. Thus the bulk of these liabilities ends up parked at the doorstep of the federal government by virtue of its ownership of entities in the generation, transmission, and distribution subsectors. In other words, the power sector cash operating cycle has a direct bearing on the government’s indebtedness to external suppliers of fuel and non fuel products and services. The magnitude of energy sector circular debt that stood at Rs2.25 trillion as of September 30, 2021 has since soared to Rs2.44 trillion.

The federal government’s circular debt management plan (CDMP), revised under review with the IMF and the World Bank, envisions an outlay of Rs706 billion over the current fiscal as a starting point. This includes Rs146 billion in unbudgeted subsidies and a Rs136 payment towards K-Electric resolution, also unbudgeted. However, this is still an ambitious target, considering it assumes an unrealistically high level of bill recovery and an unrealistically low level of transmission and distribution losses. A more realistic figure, therefore, would entail an outlay upwards of Rs800 billion. In any case, the four circular debt reduction options advanced by the Power Division for PM Sharif’s consideration earlier this week work with the former number (Rs706 billion). The first three debt reduction options drawn by the Power Division envision putting various levels of new burden on the consumers, while the fourth leaves the government to pick up the full Rs706 billion tab without any tariff hike or levy. Against this backdrop, the populist noises the PM’s office is making means the prime minister is inclined to take the fourth option, keeping the tariffs at current levels and leaving Finance Minister Dar to pony up funds to the tune of Rs706 billion from other sources – which, incidentally, leads us towards the IMF prescription of a mini-budget to mobilize additional resources.

The IMF and Pakistan’s economic managers remain deadlocked over the ninth review of the $7 billion Extended Fund Facility (EFF), holding up a $1.18 billion tranche of funding at a time when the country’s foreign exchange reserves have dropped to a puny $6.1 billion – and the circular debt is one of the major stumbling blocks obstructing progress. The details of the reform programme shared by the Pakistani side reads like the cleaning of the Augean stables, but the crux consists in making the energy sector pull itself up by the bootstraps, and there is no cogent reason why the government should not follow through with concrete action.

A look at the composition of our circular debt reveals that delayed tariff adjustments and unbudgeted subsidies together account for more than half of it, while roughly a third is attributable to distribution inefficiencies. The takeaway is that political will and technical competence, in that order, are the only two prerequisites for the resolution of the matter. Considering that technical competence can be readily bought on the market given the political will, the problem boils down to political will alone. However, all things considered, both the prongs of the government’s dilemma at this point entail exercise of massive political will: raising fresh revenue to fund the CDMP or surging consumer tariffs. Taking either of these options promises to be challenging for the government, but inaction rooted in a lack of political will is not an option at all – not only because it would stretch our energy sector to a breaking point, jeopardizing the nation’s energy security, but also because it would be politically suicidal for a government that lectures us every day about how its constituent parties are burning their political capital to put the country’s economy on an even keel. The prime minister is free to take his pick, but given the state of our economy and the implications the resolution of the problem of circular debt has for our relationship with the IMF, he does not have much time.