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EDITORIAL: Now that a staff-level agreement has been reached between the government and the International Monetary Fund (IMF) to restart the stalled $6 billion bailout programme, the Fund seems to be in a hurry to turn things around and make up for the lost time. It has already asked the government to prepare a new Circular Debt Management Plan (CDMP), complete with a pledge to continue to raise tariffs and cut down subsidies in the future. It is clearly a very big concern that the so-called circular debt has shot up to somewhere around Rs2.4 trillion, with liabilities parked in Power Holding Private Limited (PHPL) standing at about Rs1 trillion.

The government finally relented and accepted the power tariff readjustment that the fund maintained was crucial for the bailout programme to move forward. It now expects this additional tariff to play a part in reducing the stock of circular debt, which is essential if the power sector's paralysis is ever to be cured. The government has taken the first step of increasing the base tariff per unit, and a notification has been issued in this regard, while the second step of redrafting the CDMP by the finance division is in its final stage. It will mention timeframes of all steps such as future tariff increase and subsidy rationalisation that are meant to reduce the circular debt.

The government has already assured lenders that liabilities of more than Rs800 billion on the books of PHPL would be converted into public debt and the finance division will make payments to the extent of the principal amount 'as and when due', through cash or other financial instruments of course, and PHPL would continue to make payments on interest. Shortfalls shall be met through a further debt surcharge by way of an amendment in the Nepra Act.

It is no surprise that the new management plan, just like the old one, identifies high transmission and distribution losses, low recoveries, failure to rationalise tariffs and insufficient subsidies as the main factors responsible for the buildup of the circular debt. And it is a matter of some concern that its total quantum stood at less than a trillion rupees by the time the PML-N government completed its tenure, grew to about Rs1.1 trillion when the PTI administration took over, and has now ballooned to around two-and-a-half trillion rupees. So far one of the power division's main problems has been ensuring timely release of the budgeted subsidy from the finance ministry, which never pays it on time and compromises payment plans of power companies.

Now that the government and the Fund have seemingly sorted out their differences, and this particular bull will finally be taken by the horns, it will be very important to take the process forward in a systematic and calculated manner. For reforms to be successful tariffs would have to be raised and subsidies tweaked very carefully in order to keep the system running smoothly as the circular debt is surgically trimmed away. The IMF wants to rush things through in order to meet the original timeline of the reforms agenda under the bailout programme, especially since its projections have been disturbed by the rapid rise in the circular debt, but the government must still ensure caution.

The prime minister's simple refusal to go along with the tariffs in light of the overall deterioration in the economy did not work since the IMF did not budge an inch from its stated position at the time the programme was first signed. In fact the delay in agreeing to the new tariff rate has made the demands about the reforms even stiffer than they were. It must now be made sure that since there is agreement, and the reforms process is going ahead, the whole thing is done in a manner that ends are achieved, not compromised any further. So far no attempt to deal with the circular debt has been successful at all. For this one to be any different, the IMF will have to be realistic in its demands and not push an elected government against the wall.

Copyright Business Recorder, 2021