Cycle of debt

If one were to believe the finance ministry, the country is permanently three months away from solving the inter-corporate circular debt crisis in the energy sector. The problem of circular debt starts with a simple premise: the government severely overestimates its ability to influence the international commodity markets, particularly that of oil. The energy industry is highly regulated and their prices are set not by the market forces of supply and demand but by government fiat. The government decides what prices will be borne by the consumer and then pays a subsidy to the energy companies to make up for the difference between their production costs and the government-mandated prices. A fixed profit margin is also built into these calculations. The energy sector is really more of a chain. The oil and gas production companies supply to the refineries, which in turn supply the oil marketing companies, who then ensure that the power companies have an adequate supply of energy. Most of the energy, however, comes from oil imported by marketing companies such as PSO (which explains why they complain the loudest). And when the government cannot pay its share of the subsidies, the companies in this chain begin to have large outstanding payables and recievables, which are financed by banks (and thus subject to interest payments).

Unfortunately, not only does the government lack the good sense not to intervene in a market as large and volatile as oil, but it also does not have the cash to back up its mandates. Even after printing exorbitant amounts of money – causing rampant inflation in the process – the government still manages to come up short. The amount at the beginning of this month stood at Rs179 billion. The government needs to clear that liability before it grows even further. Otherwise, the lights will continue to go out across Pakistan.

Published in The Express Tribune, August 16^th, 2010.