Scared of the IMF and inflating the fiscal deficit, the government has decided to use the tried and tested ploy of borrowing from the commercial bank to partially help reduce the circular debt. This is peanuts in comparison to the effort made during the same time last year; yet, it is indicative of how things stand.
The ECCs nod to issue sovereign guarantee for syndicated term finance facility of Rs31 billion for the power sector is reminiscent of earlier such efforts by the previous government. The circular debt is believed to have swelled to alarmingly high levels in the tune of Rs300 billion, and the bank borrowing is meant to inject some money in the system through the state-run PSO for timely fuel availability, to keep the plants running in the peak summer season.
Reports suggest that the government has well and truly exhausted the budgetary allocation for power sector subsidy of Rs220 billion for FY14. The IMF has warned in no uncertain words that the subsidy should be kept within limits and be gradually reduced over time. That is why Finance Minister Ishaq Dar and company feel more comfortable borrowing money on high rates, which would eventually inflate the power tariffs (marginally), as the interest component is built in tariffs these days.
So, while the budget documents may offer a good reading on account of subsidy expenditure, it will only be a case of the "cash managers" having played another smart ploy. Enough has been said, discussed and written on what needs to be done to eradicate the chronic circular debt. Sadly, it has mostly fallen to deaf ears.
The Rs31 billion may just be the first of a few more tranches to come, so anticipate the experts. There is little shame on admitting that the government has failed on the reform side of power sector, having focussed solely on demand-side management. There have been measures taken to enhance supply, which is good for the longer-run. But, capacity is not the core issue; it is the utilisation, which is.
The sad state of circular debt suggests that there is hardly any progress on efficiency front, as recoveries keep on piling and inefficiencies refuse to go down. Spending Rs500 billion just a year ago in the name of clearing circular debt, should have been lesson enough for the government that stop-gap measures do not work. But, even if that did not teach them a lesson, nothing will.
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