Debt bomb countdown has begun
PAKISTAN since long has been in debt, except a short period of few years in 60’s.The Ayub Khan era saw a major industrialisation revolution in the history of Pakistan and constant and steady rise in exports, robust foreign exchange reserves and twin benefits of reducing poverty and higher family income and improvement in standard of living.
After the fall of Dhaka and separation of East Pakistan, things kept on getting bad for the country.
Incessant political turmoil, rapidly changing governments, uncertainty and resultant economic crisis disturbed the equilibrium and we were not left with any option except knocking the doors of I.M.F and World Bank. Thus started our slide from a prosperous and debt-free country to where we are today.
It is in fact a sad history of sorrow and gloom..
Today, Pakistan needs the IMF support to maintain healthy foreign inflows from bilateral and multilateral lenders to keep servicing over $115 billion foreign debt.
While the circular debt is emerging as one of the key risks to Pakistan’s financial and economic stability, a road map for its resolution through substantial tariff increases and governance improvement has become the biggest challenge to the revival of the $6bn IMF programme stalled since February.
It increased by Rs87bn in July and August of the current fiscal year to reach almost Rs2.24tr.
It would thus be safe to presume the total payables of the power sector at around Rs2.28tr at the end of the current fiscal year.
Since the government wanted the revival of the IMF programme before the end of December, it took key decisions and started implementing IMF guide lines over the next couple of weeks.
In recent weeks, the government has been taking steps to bridge financial gaps in gas and power sectors.
Last February the Economic Coordination Committee (ECC) of the cabinet took decisions for about Rs180bn revenue generation in gas and power sectors. However, the federal cabinet has not endorsed their implementation.
On September,2020, Special Assistant to Prime Minister briefed the cabinet about the circular debt reduction plan based on the latest data that put the power sector payables at Rs2.24tr at the end of August, up from Rs1.16tr in June 2019 and Rs1.18tr in June 2018.
The payables of Rs2.24tr included a little over Rs1tr parked in Power Holding Company and about Rs1.23tr liabilities against power companies.
Of this, the biggest chunk of Rs830bn is payable to Independent Power Producers (IPPs) followed by Rs220bn to WAPDA, Rs163bn to oil and gas companies and about Rs20bn to National Transmission and Dispatch Company (NTDC). In 2019-20, total payables or the circular debt increased by Rs538bn.
The ECC approved an increase of about 17pc in the electricity tariff and 14pc in the gas tariff to generate about Rs180bn for power and gas companies.
This would include about Rs130bn additional revenue to power companies, about Rs22bn to gas companies and about Rs27bn additional sales tax to the Federal Board of Revenue.
The PM Special Assistant was removed from the position the very next day i.e. Oct 1.
The cabinet, which met in October, deferred the implementation of new power rates cleared by the ECC.
On the other hand, the IMF team insisted on the implementation of ECC decisions on energy prices as a starting point.
After setting aside the subsidy element, the required increase in the power tariff is around 32 paisa per unit for residential consumers with monthly consumption of up to 200 units.
Other consumers will not feel the pinch of the increase given the fact that an earlier time-bound increase in the tariff came to an end on Sept 30 and will be replaced by the new charge.
On the other hand, the power sector’s receivables also reached about Rs1.44tr by the end of August.
Ironically, the biggest portion of about Rs690bn is recoverable from private consumers.
It is alarming, given the fact that power supply to small consumers is disconnected on non-payment of bills after 45 days.
As much as Rs180bn is outstanding against K-Electric while the remaining Rs567bn is payable by the public sector. In 2019-20, these receivables increased by Rs480bn.
Government presented a series of book adjustments and recoveries over the next two years until 2022-23 — the terminal year of the current government — but just Rs25-30bn improvement through loss reduction.
On top of that, the Power Division had proposed about Rs6 per unit increase in the consumer tariff and about Rs170bn recovery from K-Electric besides incentives for the industry and commerce to encourage higher consumption.
The build-up of political activities by a multi-party opposition over rising inflation, deteriorating economic conditions and an allegedly biased accountability process may stop the government from taking tough decisions.
It is already under pressure for its inability to introduce longstanding structural reforms in taxation and governance improvements in state-owned entities and the energy sector in almost half of its five-year constitutional term.
The IMF had linked the revival of its programme to progress in reforms on the tax system leading to an increase in tax collection, a clear-cut electricity and gas price adjustment mechanism along with price adjustments, a road map to targeted subsidies and the restructuring of public-sector entities.
As developing countries face the threat of a ticking ‘debt bomb’, experts have suggested reducing reliance on foreign-funded mega projects and running primary budget surpluses to stop further accumulation of debt.
In a session on the ‘Debt Time Bomb’ held on the second day of annual World Economic Forum meetings, the panelists highlighted risks of growing global debt, estimated at $250 trillion, to the economic growth rates.
Eric Cantor, Managing Director of Moelis and Company, USA and former house majority leader, Jin Keyu, professor of economics at the London School of Economics and Mithuli Ncube, Finance Minister of Zimbabwe, addressed the session.
All were of the opinion that addressing the debt issue needs to be taken as top priority item for every developing country.
In Pakistan, the debt-to-gross domestic product (GDP) ratio increased to 72.5% in the fiscal year 2018, which was far higher than the safe levels for developing countries like Pakistan.
Government’s estimates show that in the next four years, over 45% of its budget would be consumed in debt servicing.
This is a scary scenario. We are being enslaved by International donor under a well-thought conspiracy and what is alarming is that we don’t realize the gravity of situation and have no strategy to avoid the debt bomb explosion.
— The writer is former DG (Emigration) and consultant ILO, IOM.
