Circular Debt

EDITORIALS: Energy sector’s circular debt has reached 2.3 trillion rupees against 1.2 trillion rupees inherited by the Pakistan Tehrik-i-Insaaf (PTI) government a little over two years ago – a rise of nearly 92 percent. The percentage rise in the circular debt is unprecedented in the annals of the historically appallingly poorly managed energy sector and can simply not be palmed off on the flawed policies of the previous administrations.

The exhaustive list of those engaged in the energy sector at present as per the directives of Prime Minister Imran Khan includes the Minister of Energy Omar Ayub, since September 2018, Special Assistant to the Prime Minister on activities relating to Water, Power and Petroleum in Balochistan, Sardar Mohammad Rind, and Special Assistant to the Prime Minister on Power Tabish Gauhar (operating in an honorary capacity). The Cabinet Committee on Energy is headed by Asad Umer, wearing several hats including the Federal Minister for Planning, Development and Special Initiatives, and comprises Ministers for Railways Sheikh Rasheed, Omar Ayub, Minister for Maritime Affairs Ali Zaidi, Special Assistant to the Prime Minister on Petroleum Nadeem Babar with officials from the Power Division and Nepra invited as and when deemed appropriate. Taxes payable by the public on supply of electricity and gas are in the domain of the Ministry of Finance headed by Dr Hafeez Sheikh who, ironically, is not a member of the CCoE. And last but certainly not least, during the past year and a half the State Bank of Pakistan (SBP) in compliance with terms of the IMF programmme of determining the rupee value through a market determined exchange rate has depreciated the currency significantly thereby raising the rupee cost of fuel imports. The consequent impact on the utility rates has been significant that, in turn, has fuelled inflation to such an extent that the government is reluctant to raise rates as per the regulator’s (Nepra’s) recommendations for fear of social unrest spilling onto the streets.

Disturbingly, little if any effort has been expended on what was agreed with the International Monetary Fund (IMF) last year notably “a comprehensive plan for cost recovery in the energy sectors and state-owned enterprises will help eliminate or reduce the quasi fiscal deficit that drains scarce government resources. These efforts will create fiscal space for a substantial increase in social sector spending to strengthen social protections as well as infrastructure and human capital.” Business Recorder fully supported the reform package and repeatedly urged the government’s rather large energy team to focus on improving the efficiency within the sector to attain full cost recovery rather than incurring more loans and passing on the interest charges as well onto the hapless consumers like during previous administrations. In addition, the government pledged to the Fund that it would absorb part of the energy sector debt in the budget – a condition which would raise the budget deficit to even more unsustainable levels than last year’s deficit of 8.1 percent that also impacts on the general price level.

The IMF programme remains stalled since end December 2019 (the Fund indicated it had reached the second staff level agreement on 24th February this year though reportedly its Board approval for the tranche release was contingent on harsh ‘prior’ conditions including those relating to the energy sector). Energy price rises recommended by Nepra remain pending since before the pandemic. Today, there is an urgent need to go back to the Fund programme given the 12 billion dollar foreign exchange reserves, sourced mainly to borrowings and debt equity as in the past, and reports indicate that one of the major stumbling blocks is the government’s resistance to raising utility rates further that would exacerbate the plight of the people given the high food inflation already pushing a sizeable portion of the population below poverty levels.

Undoubtedly, the government finds itself between a rock and a hard place – if it raises utility rates because its costs have risen, it may face public anger and if it does not then the IMF’s tranche is at risk. One would suggest to the government to lay out a detailed upfront strategy for ending its own inefficiencies and begin talks on revisiting and adjusting the pledges made to the Fund.

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