Subsidies won end the debt spiral

Hafeez Sheikh might be facing an uphill task today answering the IMF team in Dubai, as the government, contrary to its commitments given to the Fund through its previous letters of intent, released Rs120 billion last week on account of power sector tariff differential subsidies.
What will be the consequences on the fate of the much-awaited and much-needed tranche is anybodys guess at the moment, but what the subsidy will to do the power sector is worth taking a deeper look.
That the power sector subsidies for FY11 have already surpassed the budgeted amount by some margin, is no news. It is now expected to be in the tune of Rs300 billion as per independent estimates; a whopping Rs213 billion over and above the amount allocated in the FY11 budget.
Missing the power subsidy target and missing it by some margin is considered a routine (actual subsidy overran the budgeted amount by three times in FY10) - but even by the high under-performance standards, this years underachievement beats all previous records.
So why the subsidy, one may argue? The governments answer is to wipe off the circular debt in order to curb the ever-increasing electricity shortage in the summers that has crept up to 5,000 MW. "At best, this would result in reducing the power shortage by 800-1000 MW for 3-4 weeks...the core issue still remains unaddressed," said a representative of a large power producing company on condition of anonymity.
And his arguments have substance as similar attempts to deal with the power shortage in the past, went in vain. It should be recalled that the government had issued TFCs worth Rs165 billion last year in a bid to resolve the debt spiral, but it only proved to be a short-term breather and the problem emerged again with all the vigour.
Little to nothing suggests that things would be any different this time as the strategy remains the same - that is to inject more money and hope for the best. There have been no concrete steps towards improving the energy mix, without which, thinking of a circular debt free power sector would be a fools dream.
Moreover, tariff rationalisation also seems a distant dream given the politically tough nature of the decisions. And the governments history of succumbing to politicking instead of taking tough economic decisions suggests it would not be easy to remove the tariff cost differential.
The companies involved in the debt chain should feel relieved for a while as they now have a breathing space for a month or two to carry their operations without fearing disruption in supplies.
The liquidity injection has nearly halved PSOs receivables in a matter of two weeks - something that has brought a new wave of optimism in the share prices of the related companies. OGDC and PSO have witnessed an increase of 4.5 percent and 3 percent respectively in share prices in just four trading sessions.
The rally may be short lived, however, as provision of subsidy is far from the idea of power sector reforms, without which the debt spiral will keep on coming every now and then. For a few weeks, though the petroleum and power ministries can take a breath of relief - but spare a thought for the Finance Minister. How would he still manage 5.5 percent fiscal deficit after the Rs120 billion subsidy?