The Ghost of Circular Debt Past

The PML-N Government before assuming the reins of power in 2013 had made many a promise, including the eradication of load-shedding within months. After coming to power the deadlines kept being extended and promises were repeatedly broken. In 2013, the Government cleared the Circular Debt amounting to some Rs.480 Billion, and one hoped that the menace of load-shedding and the vicious circle of debt had forever been resolved. This was not to be – for if ‘wishes were horses; beggars would ride’. The gullible people of Pakistan had reposed their optimism and trust and were let down yet again. The government has been unable to address the structural issues within the power sector, and all the maladies that they had promised to eradicate have come back to haunt them.

It is a fact that even after four years in power, the government has been unable to increase generating capacity, despite billions being poured into the sector and numerous energy projects having been commissioned. The country continues to experience load-shedding and power breakdowns. It is also a fact that the Circular Debt has once again risen to a level of Rs.400 Billion plus, with another estimated Rs.300 Billion parked in 2013. The problems in 2017 are very much where they were in 2013. It would appear that ad-hoc policies were being pursued to (mis)manage the sector and there was a total lack of governance to actually tackle and resolve the issue. There needed to be a resolve and urgency, yet what was apparent was an apathetic and at times arrogant attitude towards the problem. Those who had made tall promises appear clueless about actual development and implementation of policies and strategies.

Now when 2017 is half way through, and the Circular Debt is still very much there, the government in an ad-hoc move has decided to acquire another loan of Rs.41 Billion from Commercial Banks to retire a miniscule portion of the liability. This is akin to applying a bandage to a deep bleeding wound. There might be temporary relief but the wound will remain and get worse over time. The Rs.41 Billion repayment will not address the actual issues and challenges that have led to the accumulation of over Rs400 Billion in circular debt over the four-year tenure of the Government. It has started to appear as if the government has no strategy to manage the situation, as in the other economic spheres, apart from resorting to short-term borrowing to make repayments. There is a very famous saying in Punjabi about a Donkey, which comes to mind here!

Debt comes at a cost, and it is expected that the power consumers will be made to pay for the Rs.41 Billion borrowing (principal + interest) through the monthly bills. The loan will be used to repay the Independent Power Producers (IPPs) and state-owned enterprises such as Pakistan State Oil (PSO). Like in the past it would be the hapless consumer who would bear the brunt of inefficiencies in the system, while those taking the decisions would reap the benefits. This temporary measure is expected to provide relief for a few days as the IPP’s ramp up generation till the payment runs out.

As in most borrowing scenarios by the Government, the Ministry of Finance would be issuing sovereign guarantees to arrange the syndicated Term Finance facility of Rs.41 Billion. The amount of Rs.41 Billion will be added to the government-owned Power Holding Private Limited, where already an amount of Rs.375 Billion in Circular Debt is parked from 2013. Whichever way one looks at it, the situation at best can be described as dismal with no end in sight. The only purpose of the borrowing is to prop up a failed system by injecting temporary liquidity to keep it running.

In recent months the Government has been increasingly resorting to short term borrowing from Commercial Banks including the Chinese, to meet its fiscal shortfalls, bolster reserves, and repay existing debts. A high risk strategy at best in the absence of a firm resolution to tackle the structural issues plaguing the economy.

One of the four pillars of the IMF programme was the privatisation of power companies, which the government has been unable (or unwilling) to complete due to a lack of resolve and the opposition by the Ministry of Water and Power and the labour unions. At this point the Government also faces a LNG Circular Debt issue and is said to be negotiating a separate Rs.29-Billion syndicated facility to retire that debt.

The Ghosts of the twin (IPP and LNG) Circular Debts past and present continue to haunt the economy. It is a sad reflection on performance that even after completing four years in power and making tall claims the Government has been unable to devise strategies to tackle the issue of Circular Debt. In fact, the government has created an additional burden through contracting Circular debt in the LNG sector. Ad-hoc patchwork policies continue to be used to meet crises, and no long-term sustainable solution appears to be in sight.

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