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This is the third column in this week's series of articles covering the views of Finance Minister Ishaq Dar on the economy and major challenges confronting it. Today's edition focuses on circular debt within the energy sector.
The first step Ishaq Dar took upon assuming office in 2013 was the clearing up of energy circular debt amounting to Rs480 billion. And he did it prior to start of FY14, thus pinning the fiscal strain on the previous government. Of course it was the PPP-led coalition government that piled on that debt in the first place.
But half way through the incumbents tenure the debt has piled up again which implies that the root cause of this problem has not yet been addressed. Upon inquiring the Finance Minister admitted the shortcomings and identified loopholes within the energy sector.
Firstly, he clarified that fresh financing was not availed for the entire amount retired. Instead, Rs67 billion was taken from the USF (Universal Support Fund). Due to some litigation the money was being held in private banks. Through an ECC decision, the Finance Minister bought it into use for clearing circular debt.
While Dar insists this was the right move, BR Research believe it to be an encroachment on ICT sector and the money that was provided by telecommunication and other IT companies for enhancing out-reach of IT services to far-flung areas has been misappropriated to the power sector.
Cutting down on planned expenditures helped free up another Rs125 billion to bring down the fiscal deficit for that year from 8.8 percent of GDP, to 8.2 percent. Another Rs135 billion of federal government loans and current transfers were recovered to generate liquidity for resolving circular debt. The remaining amount of roughly Rs125 billion was covered by issuing fresh government papers, informed Dar.
Following a recap of the total amount of money raised to cover the circular debt in FY14, the conversation shifted to reasons why this serpent has raised its head again. According to the minister, loopholes persist in pricing policies, adding that "I have identified the issues, and have been trying to fix them with NEPRA for the past three months".
Offering details he stated that Mangla Dam produces six billion units of electricity every year at the cost of Rs1.75 per unit. This electricity goes into the basket for the purpose of computing average tariff. There is a contractual binding to sell two billion units of this dams production to AJK at the cost of Rs2.50 per unit. But NEPRA does not deduct that amount of electricity from its final calculations of average tariff. He informed that the difference between average cost for NEPRA and what AJK pays to it, is Rs16 billion per annum which becomes part of circular debt.
There is no allowance for other surcharges, and the debt servicing of Department of Water and Power is not allowed for adjusting tariff. This all adds up to create debt. "When the oil prices were touching the sky, adding no further burden to tariffs was plausible, but now with low fuel cost, I fail to understand why NEPRA can't do the necessary adjustment" questioned the minister. He gave examples of Brazil and Indonesia as economies where tariffs have been adjusted thus to avail the opportunity presented by lower fuel prices, to cut back subsidies. Dar is convinced Pakistan should follow suit.
"There would have been no additional burden on consumers for reducing the subsidy from Rs4.23 per unit to Rs3 per unit", he stressed adding that the summary and proposals have been presented to NEPRA but there is policy inaction, so far.
Then there is the issue of line losses which are currently permissible up to 18.3 percent. According to the finance minister, this allowance should be capped at 13 percent instead. "
The accountant turned politician is certain that without a remedy for the four problems listed above, circular debt cannot be resolved permanently. He highlighted that these four items add up a bill of about Rs119 billion, each year. "This is the bulk of Rs250-260 billion of circular debt piled up in last 20 months", he contended.
The issue has been under discussion for three months and is pending at NEPRA. The summary has already been approved by the ECC and the policy directive has been issued by the Ministry of Water and Power.
Lastly he reminded of a decision implemented back in 2005 which entails that the determination of tariffs has to be based on the best performing Disco while the Federal government bears the differential. "If we resolve this issue as well, I can guarantee you, circular debt will never re-emerge", asserted Dar.
We have initiated the process to resolve these five items and are relentlessly working on it, but for the past two and a half months NEPRA is wasting time, said Dar, taking a jab at the slow moving bureaucracy. Yet he expressed hope that this government will resolve the circular debt issue of energy sector, permanently. He ended this discussion by reiterating resolve to privatize Discos within the foreseeable future.

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