Circular debt burden

Circular debt in the power sector continues its unrelenting rise, surging by 18%, or almost Rs400 billion, in less than a year. Over half of this amount is owed to electricity producers, and these dues also account for almost the entire debt increase. Further disappointment comes from the fact that the government had actually reduced circular debt in the previous fiscal year — even if the reduction was just one per cent. The debt figure will invariably rise further in the coming months.

Even though the government did manage to reduce its interest bill, and there was also a nominal improvement in distribution companies’ inefficiency-related losses, the most significant of the underlying problems remain unaddressed. One of the biggest factors, which is also largely out of the government’s control, is the exchange rate. Experts estimate that a one per cent change in the exchange rate can cause a corresponding Rs5 billion change in the circular debt, and despite the new deal with the International Monetary Fund, the rupee remains volatile.

Even best-case scenarios predict this volatility will continue for at least a few weeks, or until additional financing from friendly countries gives us enough of a cushion to absorb the impact of the removal of import restrictions, which would allow the currency to stablise at close to its true value. Even that ‘true value’ varies drastically, depending on if you ask Finance Minister Ishaq Dar or anybody else. There is also a growing sentiment that distribution companies should be privatised, if only to eliminate the inefficiencies created by government management that no taxpayer-funded economic planners have been able to address meaningfully.

Private management may also be more interested in addressing electricity theft, while shareholders are unlikely to accept corrupt and inept management. The private sector may also have access to the finances needed for the long overdue grid upgrade, along with other technical improvement