ISLAMABAD: The federal government has not yet finalised revised Circular Debt Management Plan (CDMP) due to differences between Power Division and Finance Division on amount of subsidy and proposed increase in electricity tariff for FY 2021-22, well informed sources told Business Recorder.
The government has earmarked Rs330 billion subsidy for the power sector for FY 2021-22 against demand of Rs501 billion, which implies that allocation for subsidy is lower by Rs171 billion.
As per the previous CDMP, the government had given an undertaking to the World Bank and IMF that it would increase base tariff by Rs3.34 per unit, of which Rs1.94 per unit was notified from February 1, 2021 whereas Rs1.39 per unit has not been passed on to the consumers yet after talks with IMF on sixth review were inconclusive due to reported differences on many proposed and agreed policy actions after unceremonious departure of Dr Abdul Hafeez Shaikh.
The sources said when Pakistani authorities intimated the lenders of their decision that the remaining increase of Rs1.39 per unit in base tariff will not be passed on to the consumers due to their financial woes, the lenders officials sitting in Washington first expressed their anger at the authorities for violating the commitments made earlier but later asked for a revised CDMP which would identify measures to deal with unmanageable circular debt and full cost recovery.
On June 1, 2021, Finance Minister, Shaukat Tarin also assured the World Bank in writing that whatever agreement is signed it will be honoured.
“We have also removed the tariff increase freeze; we had imposed last year to address the challenges faced by the Covid-19 pandemic. Upon Nepra’s determined tariff increase of Rs3.34 per unit, we have notified Rs1.95 per unit in February 2021. Further, we have also approved an updated CDMP to reflect Covid-19 impact, that includes revised tariff increase schedule, and other measures to address the circular debt flow. The CDMP continues to remain an important tool that allows us to manage consumer tariffs, sector subsidies and circular debt flow,” said Tarin in his letter to the World Bank.
The sources said, Pakistani authorities had assured IMF, World Bank and ADB that revised circular debt management plan will be presented by June 30, 2021. However, the revised CDMP has yet not been finalised. Secretary Power, Ali Raza Bhutta, who has given final touches to the revised CDMP in consultation Central Power Purchasing Agency-Guaranteed (CCPA-G), will hold a meeting with Finance Minister Shaukat Tarin on proposed figures of subsidy and tariff increase.
The country’s circular debt has reached Rs2.327 trillion as of June 30, 2021. The main contribution to the circular debt’s stock was Rs130 billion from unpaid subsidies, followed by Rs72 billion from unbudgeted subsidies, Rs37 billion IPPs interest charges on delayed payments, Rs48 billion Power Holding Limited (PHL) mark up, Rs48 billion pending generation cost (QTA + FCA), Rs83 billion non-payment by Karachi Electric, Rs54 billion Discos inefficiencies and Rs74 billion Discos under recoveries.
The government has claimed that growth in circular debt which was Rs538 billion in FY 2019-20, has declined to Rs177 billion.
According to Power Division, Rs213 billion is receivable from KE as on June 30, pending due to subsidy dispute between the power utility and Finance Division.
Meanwhile, Minister for Planning, Development and Special Initiatives, Asad Umar, who is also Chairman Cabinet Committee on Energy (CCoE) and facing backlash for allegedly interfering in affairs of Ministry of Energy, has recently directed Power Division to present circular debt targets of the next two years to the CCoE within the current month (July).
On July 16, 2021, the Economic Coordination Committee (ECC) of the Cabinet accorded approval of non-cash settlement of power sector re-lent loans against subsidies payable by the government of Pakistan equal to Rs116 billion. Power Division had proposed non-cash settlement of Rs97.35 billion but during the meeting Pakistan Atomic Energy Commission (PAEC) also settled Rs19 billion from its resources, increasing the non-cash settlement amount to Rs116 billion.
Minister for Energy, Hammad Azhar, in his tweet said: “ECC has approved the financial set off mechanism for government IPPs. This means that the receivables and payables between government entities have balanced each other. This will lead to a reduction of Rs116 billion in the circular debt stock.”
World Bank argues that record circular debt flow in FY20 showed that the focus on short-term measures, such as tariff increases, were not sufficient. Exogenous factors like the rise in cost of imported fuel or the Covid-19 shock, which lessen or reverse short-term quick fixes, showed that addressing the underlying structural issues of the sector (high power costs, Discos inefficiency, untargeted subsidies, and lack of competition) is inevitable to solve the circular debt issue in a sustainable way. Also, the problem cannot be solved without all stakeholders (producers, consumers, government) collectively and equitably sharing the burden of reforms.
The sources said, IMF’s top officials in Islamabad, claim that they have verified Pakistan’s economic figures of FY 2020-21 which would necessitate a new policy matrix.
Copyright Business Recorder, 2021