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Financial setoff mechanism by govt owned IPPs may loosen the noose of circular debt; envisions Hammad Azhar

Circular debt, Pakistan’s bleeding wound has been the anathema to economic progress and social alleviation for many years. With the approval of the financial setoff mechanism for government-owned entities by ECC, circular debt may decline. Should we take it with a grain of salt or is there some weight in this?

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Circular debt, Pakistan’s bleeding wound has been the anathema to economic progress and social alleviation for many years. With the approval of the financial setoff mechanism for government-owned entities by ECC, circular debt may decline. Should we take it with a grain of salt or is there some weight in this?

Reduction in circular debt stock; a ray of shine?

After a detailed discussion, the Power Division submitted a summary on Examination, Validation of Process of IPPs Agreement, and the Cabinet Committee on Energy, approved the proposal. The committee added that the agreements with 2002 IPPs finalized by the Implementation Committee be brushed up in the light of the consultation by the National Accountability Bureau (NAB) concerning M/s Nishat Chunian Power Ltd case. Energy Minister Hammad Azhar envisions this move as a positive step towards reducing the circular debt by Rs.116 trillion.

Circular debt; albatross around Pakistan’s neck

Despite many policy measures over two years such as repeated tariff hikes, purchasing several old independent power plants (IPPs), tax rationalization, fuel conversions, and timely subsidy payments, the circular debt stands unabated. Credible sources claim that it stays about Rs 1.2 trillion at the end of the fiscal year 2023 against approximately, Rs.2.5 trillion at present.

However, not adopting these “surgical measures” is not an option. Without them, the circular debt would soar to around Rs. 4.7 trillion by the end of FY 2023. Alongside, the revised circular debt management plan shared with the lenders is the right step ahead to put the lid on mounting circular debt.

Also, the authorities have reached a close understanding with the Chinese financial institutions with the power projects as a part of CPEC. This move is likely to reduce the financial burden on the government by Rs 30 billion in the next two years. Additionally, documents by the ECC suggest that this ambitious policy will rein in circular debt to an extent of over Rs.2 trillion over the next two years.

Read more: ECC may halt payments to IPPs

Experts deem that rising circular debt is one of the biggest obstacles in the way of the country’s economic growth. In 2020-21, due to increased cost of inefficiencies and lower budgeted subsidies supplemented Rs498 billion to circular debt. Thus, the amassed circular debt was Rs 2.732 trillion in 2020-21 as the government iterated that it added only Rs 177 billion in circular debt.

What contributed to circular debt build-up in the last two years?

This “tsunami” of excess and expensive contracts inherited by the previous regimes has bled the power sector profusely. These contracts are 25pc more expensive, surpass our needs by 40-50pc, are front-loaded which entails that they signed on a higher tariff and are contracted on a “take-or-pay” basis meaning that we need to pay for them irrespective of need.

Read more: Government missed the deadline to pay IPPs, default notices to be sent

As a part of Covid-19 curtailment measures and policies, the government decided to freeze all tariff increases alongside fuel adjustment charges. This led to the surge in circular debt stock.

Nonetheless, the government’s structural reforms agenda and their implementation as a part of the Circular Debt Management Plan have resulted in arresting the debt pile up this fiscal year to around Rs. 200 million than the previous years. Thus, continuing structural reforms and timely implementation may circumvent the albatross of circular debt around Pakistan’s neck.

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