Power sector, commodity operations: Govt brings Rs391b debt on budget books

Term certificates issued to banks replaced with less expensive bonds and T-bills.


Express November 04, 2011

ISLAMABAD:


The government on Friday brought Rs391 billion outstanding debt of power sector and commodity financing operations on budget books that it had parked outside to artificially show budget deficit on the lower side, but fears remain that the power sector debt will keep piling up due to delay in implementation of reforms.


It is the third such move that has partly addressed past liabilities, as another Rs300 billion circular debt still remains outstanding besides monthly addition of Rs20 billion due to subsidies and other shortfalls.

The move will push the budget deficit up by 1.8 per cent of total national output but will enable banks to spare and lend money to energy companies for power generation. Against estimated budget deficit of Rs850 billion or 4 per cent of national economy, the gap would widen to 5.8 per cent or Rs1,230 billion excluding effects of other factors.

“The Rs391 billion was a past liability and was a tough call to add to this year’s budget,” said Secretary Finance Dr Waqar Masood in a press briefing.

Out of the total amount, Rs313 billion had earlier been parked in a power holding company by issuing term finance certificates (TFCs) to banks at an exorbitant rate – Karachi Interbank Offered Rate plus two per cent, he added.

To replace these TFCs, Masood said the government issued Rs195 billion worth of five-year Pakistan Investment Bonds (PIBs) as well as one-year treasury bills of the same amount that will help create liquidity for more financing as these instruments were liquid assets compared to TFCs.

Half of the amount of every bank would be converted into PIBs and half into treasury bills. He said the government would pay 11.82 per cent mark-up on T-bills and PIBs at an average rate of last two auctions, which was lower than what was being paid on TFCs. This will result in a saving of Rs10 billion, he said.

“It will inject new life into faltering economy as more money will be available for using the idle capacity of power plants,” said Nasim Beg, Executive Vice Chairman of Arif Habib Investment Bank.

But this is not the final solution and the government will have to take more steps to address the root cause, he added.

The government also took in its budget books the Rs78 billion commodity financing subsidy not backed by commodities.

Dr Masood said the government has not yet made a decision on the other pending liability of Rs300 billion. He said the finance ministry was stuck to its stance of only paying the price differential between the cost of power generation and the price charged from end consumers.

“How can the taxpayer money be utilised for retiring Rs142 billion outstanding bills of the private sector,” he added.

Loan talks with donors

Dr Masood said the government was negotiating with the Asian Development Bank to get $500 million loan to retire the circular debt, adding, negotiations were also under way with the World Bank to arrange money for retiring the debt.

However, the government has not yet found a solution to the Rs20 billion monthly hammering due to delay in power sector reforms. To eliminate this, the government had planned to increase tariffs by 12 per cent at the start of the fiscal year, but the delay could take the figure above 14 per cent. This means, the government will have to inject Rs67 billion over and above the budgeted amount of Rs122 billion in subsidies.

Masood said banks, led by the National Bank of Pakistan, have agreed to provide Rs6 billion to Pakistan Railways to help it repair up to 100 engines.

Published in The Express Tribune, November 5th,  2011.

COMMENTS (2)

Not me | 12 years ago | Reply

The transaction needs to be properly structured ( if at all)........this is amateurish book entry accountant transfer

Budget deficit will go up very significantly. Macro economic picture of Pakistan will look toxic

Danish | 12 years ago | Reply

The government should hire some investment banker to tailor the transaction in such a manner like the bankers did in US and EU. The country and economy will be safe and content for at least 3 years.. the ultimate goal of this govt.

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