Circular Debt has become a deeply thoughtful issue to be resolved which has consistently troubled Pakistan’s economy. It is a time bomb that can explode any time, destroying the already disturbed economic growth of the country.Circular debt is a chain of creditors and debtors, where the final creditor is in debt to the first debtor in the chain. There is a vicious cycle of unpaid bills in the power sector, right from power generation to its distribution to check recovery and theft. It revolves around fuel supply companies to the distribution network and ultimately comes up at the doorsteps of consumers. Although the successive governments have been trying their best to curtail losses by checking power theft as well as recovering unpaid bills, but unfortunately the issue has become deeply worsened. It is reported that circular debt was recorded at Rs. 486 billion in 2019. This is despite the fact that the government revised the power tariff most recently five times to cover the gap of recovery for payments to power supplying companies. Circular debt has now accumulated to approaching Rs. 3000 billion out of which Rs. 1140 billion is reported added during the present government’s tenure and the situation is getting consistently grim, with the power sector payables standing at Rs. 2.24 trillion at the end of August 2019. Out of these payables, the biggest amount of Rs. 930 billion relates to IPPs along with about Rs. 300 billion to Wapda, Rs. 200 billion to Oil and Gas Companies, Rs. 40 billion to the National Transmission and Dispatch Company (NTDC).The power sector’s receivables during this period ending August, 2020 stood at Rs. 1.80 trillion out of which Rs. 700 billion are outstanding against private consumers along with Rs. 200 billion from K-Electric and Rs. 600 billion from the public sector.
Now, one proposal is to further increase the power tariff, but this is very hard decision, as the government is already under pressure due to inflation and price hike and the opposition is also protesting on the sidelines. There is pressure by the IMF to implement this proposal along with structural reforms in taxation as well as improvement in the governance of Public Sector Enterprises (PSEs) including privatization of loss-making entities. The IMF has made it clear to the government team that it’s stalled program Extended Fund Facility (EFF) can only be revived subject to power sector price adjustment, major recovery and tax collection, roadmap for targeted subsidies and restructuring of state-owned entities.There are a host of challenges faced by the energy sector in Pakistan, consequently leading to a huge circular debt such as the pathetic state of affairs of governance in distribution companies, surplus supplies related capacity payments owing to stagnant demands and delayed decisions to produce electricity from cheaper fuels. Low recovery of unpaid bills accompanied by high power theft has mainly contributed to accumulation of circular debt resulting in difficulties of necessary working capital required to companies involved in power production, distribution and transmission. According to the sources, highly inefficient distribution companies like QUESCO and PESCO are contributing about 60 percent to circular debt. There is an urgent need to address the issue of circular debt but the most pinching question is: how? Recovery of bills is one of the most formidable challenges.
Now, the government is under negotiations with IPPs for revision of contracts to address this issue and to ease out their payments. Unluckily, growth of demand is only four percent if calculated as a compound annual growth rate compared to a meager GDP growth rate of about 3.94 %. The high cost of power generation is another challenge for the government that is adding to the circular debt.The immediate step needs to focus to renewable energy like solar, wind and local coal to get rid of heavy imports of fossil fuels like furnace oil, RLNG and imported coal. We also need investment in transmission infrastructure.
Proposed Remedial Measures To Combat Circular Debt Through Constitution Of Consortium Of Stake Holders
Circular Debt is severely affecting our GDPand creating power crises as well as budgetary constraints. The latest news is that the Economic Coordination Committee (ECC) in its meeting held on 23.9.2021 in Islamabad presided over by federal Finance Minister has released Rupees 131 billion to IPPs. Although it will surely help the government endeavors to facilitate the IPPs but as usual such steps can never be a permanent solution of this crucial issue, but it can only be used as an immediate tactical tool to gear on power generation produced by the IPPs. We must understand that circular debt is licking our national economy as a perilous termite. It will be fiasco, if it is not controlled immediately or at least substantive measures must be taken right now, failing which it will continue to offset any gain in our GDP in subsequent time periods. This will continuously result into high cost of production and high cost of production will never allow us to compete for our exports with other countries and the dilemma will be parallel increase in inflation and unemployment. This is the situation of stagflation, which is much unwarranted and must be sidestepped with all-out efforts. Therefore it is the high time, this crucial issue must be resolved or at least determined to be resolved. The government must have to act now, lest we lose all options and fall into the grip of stagflation. Without wasting any further time, the government is proposed to constitute a consortium of all stake holders included with prominent investors from different sectors, renowned technocrats from IPPs, WAPDA, NTDC, Distribution Companies, Ministry of Water & Power and Ministry of Finance with any further constituent as deemed desirable by the government. This consortium is proposed to prepare TOR, which will define the purpose and structure of their meetings and negotiations to combat the outrageous circular debt. The government will not bail out the crises, but the consortium will initially create a fund for unavoidable payments and necessary adjustments to the IPPs and other distribution channels as desirable. The consortium will chalk out the holistic strategy for single purpose to wipe out the circular debt attributed to the economic and efficient generation and distribution of electricity. This consortium in a sequence of meetings will deliberate the issue at length, prepare proposals to reduce thefts and line losses of all distribution companies, particularly Quetta Electric Supply Company (QUESCO) and Peshawar Electric Supply Company (PESCO) as the inefficiency and incompetence of QUESCO and PESCO are contributing a major share in circular debt and therefore the Consortium will chalk out holistic recommendations for the government to implement in true spirit. The consortium should be conferred with equitable representation from all provinces because distribution companies are owned by the federal government whereas law enforcement is a provincial subject. The objective is to create stakes of the provinces by giving ownership of distribution companies, and that would in return be responsible for law enforcement as part of the campaign to recover unpaid bills as well as controlling thefts in their respective provinces. At present, there is a gap in coordination as well as law enforcement in and between the federal and provincial governments so far as recovery of unpaid bills and thefts are concerned; because as mentioned the distribution companies are owned by the federal government while law enforcement is a provincial subject. Recovery of unpaid bills can also be linked with revenue transfers through NFC Award. So without such substantive measures, the issues of line losses and thefts of distribution companies particularly of QUESCO and PESCO cannot be resolved. The consortium is proposed to constitute a high level Monitoring Committee to monitor the ongoing implementation of recommendations of the Consortium. With strong monitoring of the implementation process, as well as by resolve of the government and all stake holders, this circular debt is likely to be gradually reduced and eventually it will be hopefully eradicated.
Brief Introduction of Writer
The writer is a member of Pakistan Society of Development Economists (PSDE) PIDE Islamabad, World Economic Association (WEA) Bristol UK, Pakistan Federal Union of Columnists (PFUC), Old Ravians Union G.C. University Lahore and Friends of Economic & Business Reforms (FEBR) Lahore.