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EDITORIAL: The power sector circular debt, as per a Business Recorder exclusive news item, reached a high of 2.551 trillion rupees during the first six months of the current fiscal year, showing a disturbing 10.5 percent monthly flow rise - in total terms estimated at a little under 40 billion rupees every month.

This rise is in spite of the considerable rise in electricity rates targeted to absorb the rise in costs as per conditions agreed with the International Monetary Fund (IMF) under the ongoing Stand-By Arrangement (SBA) – costs sourced to sector inefficiencies as well as the rise in fuel costs attributable to not only the ongoing international conflicts (Israel-Gaza and Russia-Ukraine) but also the levy of high indirect taxes (sales tax) on fuel – a primary source of government revenue.

While there is no doubt that the flow would have been higher by 70 to 71 billion rupees that was reportedly generated through law enforcement agencies’ crackdown against the defaulters, yet the rise in circular debt should be a source of serious concern for all domestic stakeholders as well as the lender agencies that have stipulated a proactive approach/plan to reduce circular debt flow as a key SBA condition.

Six major sources of circular debt sourced to flawed domestic policies that require structural reforms are: (i) non-release of budgeted subsidies by the Finance Ministry with reports indicating that 10 billion rupees that were budgeted for the first six months of the current year remained undisbursed with no unclaimed subsidies for this period though in the comparable period of 2022-23 around 70 billion rupees were unclaimed subsidies; (ii) delays in Quarterly Tariff Adjustments (QTAs) and Fuel Adjustment Charges (FCAs), solely for political considerations, which the SBA insists must be timely settled, were estimated at 187 billion rupees July-December 2023 against 118 billion rupees in the comparable period of 2022; (iii) Discos’ losses/inefficiencies rose to 77 billion rupees in the first half of the current year against 62 billion rupees in the comparable period of the year before with under recoveries reaching a high of 149 billion rupees July-December 2023 against 62 billion rupees in the comparable period of 2022.

Discos’ under-recoveries were 378 billion rupees July-December 2024 against 318 billion rupees in the comparable period of 2022; (iv) K-Electric receivables are estimated at 336.4 billion rupees as on December 2023 with the Economic Coordination Committee, under the chairmanship of the caretaker Finance Minister, approving 50 billion rupees on account of K-Electric’s QTA which were then used by CPPA-G to partially clear its liabilities; however, non-payment to K-Electric stood at only 9 billion rupees July-December 2023 against 91 billion rupees in the first half of 2022-23; (v) Azad Jammu and Kashmir generates 2800MW with demand no more than 400MW.

It was charged a bulk rate of one rupee per unit which was raised to 2.59 rupee per unit in 2021-22. In September 2023 the AJK Information Minister revealed that the government decided not to implement the electricity rate rise, a decision expected to place an additional burden of 10 to 12 billion rupees on the exchequer and additionally decided not to claim the July late payment charges amounting to 220 million rupees from consumers; and (vi) higher interest payments (PHPL and other borrowings) and a weaker rupee – interest charges calculated at 58 billion rupees July-December 2023 with Independent Power Producers charges at 143 billion rupees.

The power sector circular debt is therefore due to multiple complex issues and one would have hoped that by now the stakeholders (domestic and international) and sector experts would have concluded that simply passing on the buck to the hapless consumers through a massive rise in tariffs is not only not going to solve the problem but may actually exacerbate it. Careful thinking is required and a strategic plan needs to be formulated, as per the requirements of the SBA, and then rigorously implemented.

Copyright Business Recorder, 2024

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