Vicious Cycle of circular debt

Saadia Saadat

To my surprise, it’s only been 50 years since Bangladesh got its indepen dence. But they are now self-sufficient and in a position to give out a $50 million loan to Singapore to help her out of foreign exchange crisis.

While, our debt trap is burgeoning day by day and Pak rupee losing its worth, Pakistan has been under IMF program for a long time now, but our indebtedness has increased manifolds recently.

Pakistan’s public debt stood at 86.3 percent of its GDP in 2018 and now this has risen up to 97.4 per cent. Country’s circular debt which was Rs.1.148 trillion in 2018 under the previous government has more than doubled to Rs.2.3trillion, ever since this Government has taken charge and is expected to reach Rs.4 trillion by 2025 if no reforms are made.

One major factor contributing to Circular debt is capacity payment charges, payments made for not utilizing the installed power capacity which stood at Rs.664 billion in FY19 while, at the moment it is Rs.900 billion, this accounts for over two percent of GDP but may hit to eight percent of GDP under prevailing circumstances.

In our power sector the debt issue has now aggravated to an extent where the national exchequer can lose billions of dollars in case of default of capacity payments to IPPs as our projects run on Take or Pay basis.

As this is not a budgetary item, hence recovered by increasing the electricity bills that is why we have witnessed a constant increase of electricity tariff.

The three main factors owing to the misery of circular debt are power theft, T&D (transmission and distribution) losses and power purchase agreement with independent producers (IPPs.) Pakistan has the highest electricity prices in the South East region. Our household consumer price is almost the same as our neighbouring counties’ business rates.

Hence, they are more meritoriously able to compete in the international market, therefore, we have seen a recent boost in textile industry’s export from Bangladesh as they are able to keep their cost lower.

In Pakistan, electricity prices for consumers range from Rs.2-24.92 based on the number of units consumed and then the general public is further loaded with numerous taxes with fancy jargons almost 30% on top of the units consumed.

To these, further taxes are added to the electricity bills to keep up with the liabilities but regrettably, we still see a constant surge in our Circular debt.

In Pakistan, many people deliberately indulge in malpractices of power theft to avoid paying heavy prices of electricity which not only contribute to heavy losses to national exchequer but also contribute to further price hike of electricity.

Big Businesses also conduct unethical behaviour to preserve room for negotiation, in order to compete in the international market. Recently, a scandal has been unearthed about the Sitara Group of Companies and it is alleged that they have contributed Rs.12 billion loss to Exchequer.

They manipulated the system using a two-part tariff from the national grid for their industrial complex and at the same time exporting very expensive electricity on a single tariff basis to the national grid. Unless there is a big crack down on these culprits we will keep on adding to the debt cycle.

Theft of electric power is a major problem faced by all electric utilities (DISCO’s) in Pakistan at present and it amounts to 60% of losses.

So this act should be made a cognizable offense with imprisonment along with hefty fines, which could also lessen the debt burden.

The next in line are T & D losses through technical and non-technical losses Rs.54 billion was added in Circular debt which is 23% increase from the previous year.

To circumvent this, the Government should take initiative to fix all the faulty lines, sluggish meters and should introduce the concept of smart prepaid meters as this, not only will help figuring out the demand and help them plan effectively in advance, but will also benefit in energy audits and mitigating power thefts.

Recently Bangladesh has taken this initiative and by 2023, they will bring all consumers under smart pre-payment metering system in order to reduce system losses, pilferage and over billing.

Last but not the least the IPP’s has a bigger role to play in Circular Debt. Recent comprehensive investigation report on ‘IPPs’, highlights enough evidence of false contractual terms and condition, irregularities in operation of PPA, anomaly in payments of CPA, variance in pass through items etc., and we expected that those evidences will be used to twist arms of IPP but, alas nothing has been done so far.

Then, our currency devaluation acted as a catalyst in our already overwrought economy. At least, under the then Finance Minister, Mr. Ishaq Dar’s policies, our economy wasn’t strained with additional debt due to currency devaluation.

That debate is separate, whether it was good or not as many countries around the world choose a pegged exchange system. So there are strong valid points on either side of the fence.

Pakistan has increased energy generation capacity but hasn’t been able to sell energy effectively, making it unaffordable and the Government has to further increase the electricity tariff and we enter into a vicious cycle of Circular debt. Writer is freelance London based Columnist.

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