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Relentless circular debt in energy sector

Currently, Pakistan’s circular debt stands at a whopping Rs1.4 trillion, which includes the loans accumulated by previous governments. The alarming source of this burden is the persistent IOUs that keep piling up among all the stake holders in the energy sector supply chain. This includes power distributors, power producers, as well as oil and gas companies – PEPCO (Pakistan Electric Power Company), IPPs (Independent Power Producers), K-Electric, Pakistan State Oil and Sui Southern Gas, to name a few.

Circular debt occurs when one entity facing problems in its cash inflows holds back payments to its suppliers and creditors. Therefore the problems of cash inflow of one force down to other segments of the payment chain. This issue is persistent in the energy sector for last many years and have seriouseffectsin economy. One of them is cash flow constraints. This enhances operational inefficiencies of the companies in the power sector. Even some companies are operating below their capacity due to liquidity constraints. Subsequently the increase in the power supply deficit has also contributed to supply-side constraints. Therefore the buildup of circular debt has led to a reduction in the potential gross domestic product (GDP) of the country.

CD - Fig 1

The key players in circular debt of energy sector are involved in the supply of primary energy to power generation companies; including oil/gas exploration companies (e.g., OGDCL and PPL), oil refineries (e.g., ARL, Parco), distribution companies in gas (e.g., SNGPL, SSGC) and oil (e.g., PSO, Shell). Power generation and distribution companies e.g. K-Electric, Independent Power Producers (IPPs), Hub Power Company and Kot Addu Power Company, captive power producers, rental power producers, WAPDA Hydel, and the Pakistan Electric Power Company (PEPCO). Whereas include individuals, industries, and the government sector are consumers. It may be noted that tariffs paid by power consumers (often subsidized by the government) are used to make payments at various stages of the energy supply chain (i.e., power generation and distribution companies and suppliers of primary energy).

 

The circular debt, caused by debt piled up due to electricity leakages, theft and low recovery of bills from many state-owned offices, schools, police stations, monuments and others, has crossed the Rs1.4 trillion mark. The government is targeting to brought down to Rs293 billion during the current year and to Rs96 billion by 2019-20. A 25-year plan for coping demand and supply of power had been formulated.

In a report of the International Monetary Fund (IMF), the debt pile that the present would leave behind at the end of the five-year term will be equal to 84.1% of the size of Pakistan’s economy – far higher than the gross public debt at the end of the previous government.

As per IMF annual report, the public debt-to-GDP ratio will be at 84.1% of gross domestic product (GDP) by 2023, higher by 12 percentage points than the level left behind by the previous government. The report also says that Pakistan’s total financing needs have shot up alarmingly to 42.3% of the size of its economy, or Rs16 trillion, due to maturing debt and yawning budget deficit – a trend that will further worsen in the next fiscal year.

CD - Fig 2

Last word. The resolution of circular debt is necessary as this will ease supply constraints. The task is challenging since it requires the outstanding stock of circular debt to be cleared before plugging further build-up of circular debt receivables. One key lesson is that power subsidies can be sustained only if these are explicitly recognized in the fiscal budget; otherwise, the economy will continue to suffer from the indirect cost of these subsidies.

The writer, Mr. Nazir Ahmed Shaikh is a freelance columnist and is an academician by profession. Currently he is associated with SZABIST as Registrar and could be reached at nazir.ahmed@szabist.edu.pk.

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