Resolving circular debt: ECC approves Rs160b swap deal with banks

Central Power Purchasing Authority to make interest payments as deal likely to be kept out of the budget.

ISLAMABAD:

The highest economic decision making body on Friday approved a Rs160 billion debt swap deal with commercial banks to help clear the circular debt, a move that will temporarily ease power sector liquidity problems.

Headed by Finance Minister Dr Abdul Hafeez Shaikh, the Economic Coordination Committee of the Cabinet approved the debt swap deal, said a senior government functionary after the meeting. This will transfer the liabilities of the independent power producers and some other entities to the government books.

These entities had to borrow from the banks after the government failed to make them timely payments. The government is in a catch-22 situation. If it clears the electricity arrears the budget deficit swells and if it delays the payments the power generation gets affected, causing unannounced load-shedding in the country.

“This is not a government liability as it is a clean deal and the Central Power Purchasing Authority will make interest payments on the amount,” said Rana Assad Amin, the Finance Ministry spokesman. He said the federal government has only provided sovereign guarantees. Amin said the receivables and payables of the CPPA were almost equal and the decision would ease the financial woes of power producing companies.

However sources said that some of the committee members proposed to recognize the payment in the current year’s budget.

If the government books the deal as an obligation, the budget deficit is likely to touch 7.3 per cent of the total size of the national economy or Rs 1.53 trllion.

Sugar procurement

The ECC also decided to procure 100,000 tons sugar from the influential millers to ease their cash flow woes. It is for the second time in less than a month that the government has decided to rescue the mills by using taxpayers’ money. It had earlier procured 378,000 tons sugar at Rs 46.25 per kg, bringing the total cost to Rs17.5 billion.

An official of the Finance Ministry said that the ECC has approved Rs50 per kg as the indicative price and the final decision will be taken after the tender. The millers had asked the government to either procure sugar or allow its export. The ministry had sought permission to procure 600,000 tons sugar but the ECC allowed only 100,000 tons.

An official handout stated that Sheikh directed the Trading Corporation of Pakistan to make the payment to all the millers on account of last procurement. It added the Chairman TCP informed the ECC that eight millers have been paid and the rest will be paid by the end of this month. Analysts have been urging the government to allow export of surplus sugar.

Sales tax on tractors sales reduced

In another significant decision, the ECC endorsed a decision of the special cabinet panel to decrease sales tax rate on sales of tractors from 16 to 5 per cent. The official handout said that the cabinet committee had unanimously agreed to recommend sales tax on agricultural tractors to be reduced to 5 per cent. However, the ECC constituted a committee to work out a mechanism to bring the rate back to 16 per cent in three years. It also asked the Zarai Taraqiati Bank Limited to resume loaning facility to farmers with immediate effect for procurement of tractors.

The ECC also constituted a sub-committee comprising Ministers for Water and Power, Petroleum and Natural Resources, Deputy Chairman Planning Commission and Secretary Finance to look into Gas Sale Purchase Agreement with Turkmenistan along with Gas Pricing formula under the Inter State Gas System Private Limited with Turkmenistan.

The ECC principally approved Low BTU Gas Pricing Policy for 2012, but made subject to concurrence of the Law Division. The summary moved by Ministry of Petroleum and Natural Resources maintained that this policy will be instrumental in providing sufficient incentives to the investors in the field. The ECC while formally granting approval maintained that before its execution, Law Division would be approached by the Ministry of Petroleum & Natural Recourse so that its transparency is ensured.

Published in The Express Tribune, January 21^st, 2012.