CIRCULAR DEBTS DISCOURAGE FOREIGN INVESTMENTS

SHAMSUL GHANI
(feedback@pgeconomist.com)
Oct 18 - 24, 20
10

The graph of energy sector inter corporate debt shows that the problem is here to stay for a time much longer than envisaged by many. The recurring strength of the issue is certainly alarming. Pakistan Economic Survey 2009-10 took a lenient view of one of the most deceptive economic issues by mentioning : "the net position of overall circular debt is witnessing a declining trend during July-April 2009-10 as the end-month net position of overall circular debt declined from Rs190,953 million in July 2009 to Rs103,939 million in the month of April 2010.

NET POSITION OF INTER-CORPORATE DEBT AS ON APRIL 30, 2010 (MILLION RS)

ORGANISATION PRINCIPAL RECEIVABLE (A) PRINCIPAL PAYABLES (B) NET POSITION (A-B)
PSO 106,421 75,996 30,425
Sui Southern Gas 26,245 27,211 -966
Sui Northern Gas 11,880 20,406 -8,526
PEPCO 191,005 230,715 -39,710
OGDCL 79,891 151 79,740
PARCO 29,857 - 29,857
KESC 14,800 38,410 -23,610
GHPL 10,567 - 10,567
PPL 25,931 - 25,931
KW&SB 8,044 7,814 231
TOTAL 504,642 400,703 103,939

Involved in the circular debt imbroglio are almost all major players having presence in the energy sector. Those outside the energy sector are PIA, Pakistan Steel, GOP, FATA, AJK, City Government Karachi, private and government consumers, provincial/federal government departments, etc.

The impression that the disease had taken a benign course has been proved wrong by the post-April-2010 developments. In a recent meeting of the Senate Standing Committee on Petroleum and Natural Resources, it was revealed that the circular debt figures have mounted to Rs235 billion in addition to the liabilities assumed by the power holding company of Pakistan. Most severely hit by the situation seems the PSO which has piled up its receivables to an approximate mark of Rs150 billion out of which Rs130 billion are owed by the power sector. PSO representative present in the said Senate Committee meeting disclosed that PSO was on the verge of declaring 'force majeure' as its payable accumulated to Rs122 billion - Rs89 billion owed to refineries and the balance to the foreign suppliers - and it was not possible for it to pay off foreign liabilities. While PSOs problems need immediate attention, its inherent financial strength should preclude it from taking such extreme measures as 'declaring force majeure'.

Inter corporate debt problem has long relinquished its position of a minor domestic issue. It has now become an international concern particularly for the international lenders who have taken a serious view of this unresolved economic and financial irritant. Both ADB and IMF have advised Pakistan to take positive steps to resolve this thorny issue. ADB has linked this issue with the materialisation of upcoming ADB assistance programs. IMF has even cautioned Pakistan of an impending commodity circular debt crisis. The drying up of foreign investment is directly linked with this issue. The globalisation of economy has imparted the financial operators an acute sense of market differentiation. They are very conscious of the value of their funds and are always on the look out for markets that are capable of managing their money both in economic and financial terms. Equipped with modern analytical techniques and sophisticated economic forecasting tools, they can visualise well before others are able to do so, the market response to any political or economic policy changes that are in the offing in a particular economy. The sovereign and hedge funds engage high-profile and highly-paid financial technocrats to handle their money with the foremost objective of increasing the wealth of their sponsors. To attract these funds, the markets have to be dynamic and operational in a vibrant economy. Pakistan used to be a dynamic market till 2007 when it attracted a historically high foreign investment of $8.4 billion. With the destabilisation of an economically stable government that had accumulated $17 billion in reserves and had got rid of IMF, foreign investors had no reason to stay in a tumbling market.

The political change that was in the air at the fag end of 2007 made the foreign funds manager skeptical of the efficiency of the replaced material - the democrats and they exited the market en masse. The two and a half year rule of the elected government simply ratifies the foreign investors' decision to quit Pakistani market. While we continue to take pride in our follies - by coining such irrational statements as 'the worst form of democracy is better than the best form of dictatorship' - the foreign investors have put their faith in economic history which shows that growth and stability indices invariably remained low during the so-called democratic periods. Pakistan's worsening economic condition and the effects of global recession should make it clear that it's going to be a long wait before the foreign investors decide to return to the country's markets. The steep fall in the size of foreign investment after 2007 is indicative of the foreign investors' perception of local markets. This perception is not going to be altered soon, at least not till such time the inter corporate debt issue is settled once for all.

FOREIGN INVESTMENTS IN LAST 5-YEAR
(IN MILLION US$)

FOREIGN INVESTMENT SECTOR

FY-07 FY-08 FY-09 FY-10 JUL-AUG FY-10 JUL-AUG FY-11
Foreign Direct Investment-1 5,139.6 5,410.2 3,719.9 2,200.2 344.5 171.4
% of Total Foreign Priv.Invst 73.8% 99.6% 115.9% 78.9% 79.1% 65.7%
Private. Portfolio Invst-2 1,820.4 19.3 (510.4) 587.9 91.1 89.5
% of Total Foreign Priv.Invst 26.2% 0.4% (15.9)% 21.1% 20.9% 34.3%
Foreign Private Invst-3=1+2 6,960.0 5,429.4 3,209.5 2,788.1 435.6 261.0
Public. Portfolio Invst-4 1,468.3 20.8 (544.1) (652.4) (30.2) 6.1
Other Public Invst-5 - - - - - -
Foreign Public Invst-6=4+5 1,468.3 20.8 (544.1) (652.4) (30.2) 6.1
Total Foreign Invst-7=3+6 8,428.3 5,450.2 2,665.4 2,135.7 405.4 267.1
Y-o-Y % Increase/(Decrease) 87.9% (35.3%) (51.1%) (19.9%) _ (34.1)