Circular debt eases : Govt releases Rs120b power sector dues

Capital injection expected to improve performance, but budget deficit to rise.

ISLAMABAD:

The government has paid Rs120 billion overdue electricity subsidies to improve the financial condition of power companies, leaving it with the option of either letting the budget deficit slip to 6.3 per cent or playing with the figures to restrict it to 5.5 per cent.

The payments would partially improve the balance sheet of the power sector that has been crippled by the government’s inability to pay price differential claims. The arrears that have increased to Rs288 billion are one of the main reasons for the massive power shortfall, recorded at 7,200 megawatts on Tuesday, as companies are not running at optimum capacity. The capital injection will enable power companies to purchase fuel for electricity generation.

The payments have been made to the Pakistan Electric Power Company (Pepco), Pakistan State Oil, oil refineries, power generation and distribution companies. However, these will widen the budget deficit by another 0.7 per cent of national income, torpedoing the revised fiscal framework.

The government that has been struggling to restrict the budget deficit to Rs941 billion or 5.5 per cent of Gross Domestic Product (GDP) is now facing a situation whereby the gap may swell to Rs1,078 billion or 6.3 per cent.

Finance ministry officials said so far the ministry was reluctant to pay its dues because of the negative implication for the budget deficit - the gap between national income and spending. Officials added that the government paid Rs98 billion on Wednesday while the remaining Rs22 billion would be released today (Thursday).

Sources said the finance ministry was considering deferring payment of other subsidies like those for agriculture and fertilisers to the next financial year. There is an option to even defer some of the electricity subsidies of this fiscal year.

Any attempt to play with the figures may invite the International Monetary Fund’s wrath that in the past slapped penalties after noting tempering with budget figures.

According to the Budget Strategy Paper 2011-12, the government will pay Rs186 billion electricity subsidies by June-end. The accumulative power subsidy for this year and the previous two years amounts to Rs306 billion. The finance secretary was not available to comment on the issue.

The circular debt still stands at Rs168 billion even after Rs120 billion payments. The major factor for the debt now is the refusal of provinces to pay their dues to Pepco. The four provinces, Fata and AJK owe Rs106 billion to Pepco, according to official documents. Of this amount, a major chunk of Rs76 billion is due to be paid by the provinces. Punjab owes Rs9 billion whereas Sindh owes Rs37 billion.

The ongoing massive power shortage is partly because of oil and gas shortages and partly because of inefficient power plants. Although the government has paid a handsome amount, there is still a big question mark on the sustainability of the power sector due to resistance to reforms. The government is not ready to completely disband Pepco and it is also not amending the National Electric Power Regulatory Authority Act that is necessary to ensure full power tariff recovery.

Karachi Electric Supply Company’s (KESC) tariff structure is another source of concern. This year alone, the federal government will pay Rs40 billion subsidies to KESC on account of price differential.

The other major factor is longstanding receivables from private consumers. All the distribution companies are unable to recover Rs69.7 billion from private consumers which are overdue from two months to three years, according to the documents.

Published in The Express Tribune, May 5^th, 2011.