As circular debt keeps on increasing due to unsatisfactory recoveries and persistently higher line losses, the federal government decided on Friday to retire Rs31 billion of circular debt with borrowing from commercial banks to keep power plants running during summer.
The amount to partly pay off the debt would be borrowed at an interest rate of around 11%, the Economic Coordination Committee (ECC) of the cabinet decided in a meeting. The committee is headed by Finance Minister Ishaq Dar.
The move to reduce circular debt outside of budget allocations will help the government avoid an adverse impact on fiscal deficit, as it tries to keep the gap at 5.8% of national output, which has been agreed with the International Monetary Fund (IMF).
However, the borrowing will lead to a marginal increase in electricity prices as the principal amount and interest will be recovered from the consumers.
This may tantamount to punishing honest consumers who regularly paid their bills but the government had to take the step in order to continue to run the power plants, officials said.
The IMF had been assured that the country would recover the amount from the consumers, IMF documents showed.
As the government is unable to cope with rising electricity demand during warm weather, urban areas are facing 8-10 hours of outages a day while rural areas experience 12 to 14 hours of load-shedding.
“The ECC approved a summary of the Ministry of Water and Power for issuance of sovereign guarantee by the Ministry of Finance in respect of indicative terms and conditions for the syndicated term finance facility up to Rs31 billion for the power sector,” said an official handout.
A finance ministry official said the Pakistan Power Holding Company, a subsidiary of the Ministry of Water and Power, would raise the money from a consortium of commercial banks, led by National Bank of Pakistan.
The money will be borrowed at an interest rate of Karachi Interbank Offered Rate (Kibor) plus 1%.
It will be paid to Pakistan State Oil for restoring fuel supplies to power plants. After the payment, the circular debt would still be around Rs250 billion, said the official.
The finance ministry has so far released Rs232 billion in subsidies to cover the difference between power generation cost and end-consumer prices.
Finance Minister Ishaq Dar has already refused to pay bills on account of lower recoveries and line losses, caused by electricity theft and rickety transmission infrastructure. Sindh was the largest defaulter and was not paying overdue electricity bills amounting to over Rs50 billion, said the official.
The ECC also approved a Ramazan relief package, allowing the finance ministry to pay up to Rs2 billion in subsidies. It cleared Rs6 per kg subsidy for wheat flour, Rs10 per kg for ghee and oil, Rs10 for pulses, gram, gram flour, dates, (Sella) rice, broken rice, squashes and syrups.
On black tea, the ECC allowed a subsidy of Rs50 per kg and for milk it agreed on a relief of Rs10 per litre.
It also considered a summary of the Ministry of Water and Power about policy framework for private sector transmission lines. The policy covers transmission lines and grid stations of 220 kilovolts and above.
The period of the project will be five years and the Private Power and Infrastructure Board will provide one-window facility.
Published in The Express Tribune, May 17th, 2014.
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