Rs103b sanctioned for circular debt

The first tranche of additional power subsidies worth Rs335b agreed with IMF

ISLAMABAD:

The government has sanctioned Rs103 billion in additional subsidies to reduce the power sector’s mounting circular debt amid disclosure from Prime Minister Shehbaz Sharif that the outstanding dues of Chinese power plants have surged to Rs450 billion.

The Ministry of Finance gave the subsidy to settle the claims of K-Electric (KE) and Azad Jammu and Kashmir. The Rs103 billion unbudgeted subsidy is the first tranche of additional power subsidies worth Rs335 billion that Islamabad had agreed to pay under an understanding with the International Monetary Fund (IMF) in February, according to government sources.

At a time when the Power Division was in process of clearing additional subsidy claims, the PM revealed that the “outstanding dues of the Chinese power plants have increased to Rs450 billion”. The PM made the statement while addressing a meeting of the parliamentary party.

PM Sharif said that the Chinese dues had mounted to Rs450 billion despite his government paying Rs150 billion to the Chinese producers during the past one year.

In breach of its commitments under various agreements signed with the Chinese power producers, Pakistan has not been able to pay the cost of electricity in a timely manner due to the poor performance of the power sector and a shortage of foreign currency. The Chinese power plants are facing an acute shortage of raw material – primarily coal – required to run the plants and are so far showing restraint by not triggering dispute settlement mechanisms.

The huge outstanding dues on account of power purchases underscores the financial meltdown of the power sector due to fewer budgeted subsidies, higher line losses, low recovery of electricity bills and inefficiency of the public sector.

For the current fiscal year, the government had budgeted Rs570 billion in power subsidies, which after a recent understanding with the IMF, will now surge to a minimum of Rs905 billion.

An official from the finance ministry said that the funds will go to Central Power Purchase Agency-Guaranteed (CPPAG), which will settle payments with the IPPs as well. The money has been given as an advance subsidy, which will be adjusted against the claims filed by the energy ministry for the current fiscal year.

The reconciliation of power sector subsidies remains an issue, as the finance ministry officials said that despite repeated requests, and a decision made by the Economic Coordination Committee (ECC), the Power Division is reluctant to provide year-wise details of the outstanding subsidy.

Of Rs103 billion, an amount of around Rs49 billion will be adjusted against the KE claims and the remaining Rs54 billion against the AJK claims.

A taskforce, constituted by the PM, to resolve issues related to KE was negotiating a package of documents to reach a sale purchase agreement, payment of tariff differential subsidies and resolution of other disputes.

Power sector losses are on the rise despite a significant increase in prices. In February, the government approved increasing electricity prices in the range of Rs3.3 to Rs15.52 per unit for residential consumers, farmers and exporters to recover an additional Rs237 billion in four months.

The revised circular debt management plan showed that despite a significant increase in prices, and an additional Rs335 billion subsidy, the circular debt stock will jump to Rs2.37 trillion by June this year.

Circular debt, that was earlier projected to come down to Rs2.1 trillion, will now grow to Rs2.374 trillion – an addition of Rs261 billion despite a massive surge in electricity prices.

The cabinet had also approved deferring the repayment of Rs283.3 billion in debt obtained for retiring the old circular debt for two years. The deferment, however, has put an additional burden of Rs3.23 per unit on electricity consumers on account of debt servicing costs on delayed payment.

Sources said that under the IMF-Pakistan understanding, an additional subsidy worth Rs115 billion will have to be paid in April. While the Power Division had requested the release of over Rs200 billion, the finance ministry agreed to only Rs103 billion.

The second tranche of Rs115 billion will be given to pick another KE subsidy worth Rs67 billion and Rs36 billion to settle the outstanding dues of exporters. The remaining Rs12 billion will be given to the Balochistan tube-well subsidy.

The last tranche of Rs120 billion will be released in June to settle the dues of the exporter’s subsidy, Kissan package, fuel cost adjustment, KE, AJK and Balochistan, according to the sources.

Published in The Express Tribune, April 4^th, 2023.

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