EDITORIAL: The circular debt reduction and the tariff reduction plans proposed by the Ministry of Energy have been rejected by the IMF (International Monetary Fund).
The Fund does not support these plans. While there was no confusion on the plan for tariff reduction, there were conflicting reports from the petroleum ministry on the circular debt reduction plan, and this is perhaps due to stock market sensitivities.
The circular debt reduction plan has been very well covered by this newspaper. A two-pager plan was first proposed by the PTI (Pakistan Tehreek-e-Insaf) government in 2021, and later a slide deck was created by the PDM (Pakistan Democratic Movement) government in 2023. Now, a full-fledged report is being prepared by caretakers in 2024. The credit goes to the caretaker Ministry of Energy for doing the necessary work.
In simple words, the plan is built around the settlement of energy circular debt stock which has been piling up over the years mainly due to mispricing to consumers while Sui companies responsible for transmission and distribution struggled to pay Exploration and Production (E&P) companies.
However, the latter kept on declaring the receivables as profit instead of writing them off. If these debts are settled, this could encourage mispricing in the future as well. That creates a moral hazard, as this sets a precedent for mispricing and then settling accumulating debt again in the same fashion in the future.
This is perhaps one of the contexts in which IMF may have rejected the proposal. The statement issued by the IMF Mission Chief, Nathan Porter, clearly stated that the proposed plan does not address the underlying problems, and there are fiscal risks in the Circular Debt (CD) reduction plan, given the chain of transactions.
Additionally, it would continue to use supplementary grants, which historically have burdened the fiscal accounts.
While the plan has been rejected by the Fund, there are those close to government that believe that CD stock settlement may still be carried out in future. Some are saying that the government may do it in the small window after the expiration of current SBA and before the signing of the next EFF of IMF. However, that could jeopardise the talks for the next IMF programme.
Therefore, the government must tread with care. Notably, it was reported on the social media on 10th February that IMF had not given consent to the CD reduction plan, which was promptly refuted by Ministry of Petroleum on 11th February through a tweet. Interestingly, the memo was sent to the Ministry of Petroleum on 9th February where the Fund had categorically stated in the first line that it did not support the CD reduction plan.
One may wonder why the ministry refuted a report which was based on facts, especially, when the said plan is tantamount to paying hefty dividends by the listed E&P companies. Stock prices rallied recently in anticipation of the implementation of this plan.
Some players in the market may have derived advantage on the basis of the factual information that was incorrectly denied in the public domain. The government officials need to demonstrate not only abundance of caution but also full transparency in communicating information that has a direct impact on prices of some stocks listed on the bourse.
Moving on, the plan is rejected, and the earliest it can resurface is in the budget of FY25 where the government should state the budgetary slippages due to dividend payment to minority shareholders and state the amounts coming back to the government in the respective accounts. Theoretically this can happen, but the chances are slim.
The government should rather focus on stopping the flow of circular debt by focusing on broad-based reforms, including a meaningful reduction in the high cost of energy, discernable improvement in compliance, a major cut in theft and line losses, and a visible improvement in governance of Discos.
Copyright Business Recorder, 2024
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