Overcoming circular debt

The deal with 18 commercial banks that will see Rs1.25 trillion go into settling the soaring circular debt has come as an out-of-the-box remedy. Circular debt has been an enigma for the economy as it constitutes 4% of GDP, stagnating growth and creating external balance problems. The energy sector, owing to this mounting debt, has become dysfunctional and one with dire repercussions on public finances and social developmental programmes.

Under the arrangement, Rs659 billion would be used for loans payable by Power Holding Ltd (PHL), and the remaining Rs556 billion would be used to pay dues to IPPs and petroleum sector entities, and make subsidy adjustments, including through book adjustments and cash settlements. The complex restructuring is a step in urgency to overcome repayment issues, as these dues will be serviced through a Rs3.23 per unit surcharge on consumers for next six years.

But the million-dollar question is how the exorbitant power generation and distribution problems can be addressed. The IPPs have been an unfair deal with the nation, leading to supra-inflated electricity bills — one of the most expensive in the region. This phenomenon has shunted out businesses and made exports untenable.

Last but not least, the capacity payments to the power producers in US dollars has led the economy to the brink. It is no joke that consumers are forced to pay Rs24 per unit as capacity payment, as NEPRA doled out billions per month to the IPPs that were even below the mark of power generation to the national grid.

Now is the time to address this riddle in a professional and rational manner, and let production take root at a bearable cost. While this "largest financing" in the country's history resolves the immediate structural issues of the power sector to an extent, the need of the hour is to opt for privatisation of power distribution companies, by shunting out public liabilities, and dealing with improper dissemination and theft of electricity. A strategy in wings should be to lessen the dependence on hydro-thermal power generation and go the renewables way.