Sukuks alone, not the answer

The IMF seems to have rewarded the financial mangers for the discipline and “A” grade performance in the first few months of the programme. The IMF nod is finally here, as regards issuance of Sukuk bonds – as the Fund has given a go ahead to issue fresh sovereign guarantees of Rs250 billion. The Sukuk issue will be primarily aimed at tacking the circular debt, and could also be used for other areas.

Recall that the IMF programme had earlier capped sovereign guarantees, and an attempt to issue Sukuk worth Rs200 billion, aimed at tackling the infamous circular debt hit snags back in July 2019. Truth be told, the circular debt stock has been building at a much reduced pace than it was earlier. Numbers vary from Rs8-12 billion daily accumulation, which is a significant improvement from Rs18-20 billion not so long ago.

This has almost everything to do with rationalized tariffs in January 2019, and a good compliance in terms of not going into the unfunded subsidy territory. The IMF programme has further tightened the screws, as far as power pricing is concerned and timelier tariff announcements are now taking place and are being reflected in consumer tariffs.

Seeing improvements in the circular debt buildup, and the IMF’s nod to go ahead with Sukuk – the Finance Adviser, went a step too far in predicting that the circular debt will be wiped out by end of 2020. Now, that is a tall statement. Deadlines have not exactly worked very well in favour of Pakistani politicians of today and yesteryears alike. Confidence is one thing, overconfidence is another, and Hafeez Shiekh, may well want to revisit his words, sooner or later.

A few considerations needs to go in while talking about circular debt and its permanent solution. Sukuks will help, there is little doubt in it. But this is not the first such effort to address the issue. The fact that circular debt remains even today, with a sizeable sum, tells you Sukuks are just another cog in the engine, and not the entire solution.

The IMF too, had asked the government to come up with a concrete plan on circular debt resolution. One hopes that the plan would go well beyond Sukuks. The IMF will ensure that it takes care of the pricing end of the equation, as most IMF programmes do. But there is an end to how much one relies on tariff rationalization alone to put an end to the circular debt.

The inefficiencies in the system continue to exist even today. The refineries of the country continue to produce furnace oil. That will continue to be procured, and the power mix will continue to have some share of furnace oil, regardless of its merits. The distribution sector is yet to see a visible improvement in losses, which run high in double digits. The system continues to incentivize underperformance to distribution companies. There is the small issue of ballooning capacity payments, providing for which, may become a headache, given how the demand projections have historically worked in Pakistan.

Good luck to the authorities aiming to eradicate circular debt. But Sukuks alone was not the answer yesterday, it won’t be the sole answer today. The effort needs to be well-rounded, well-spelled and more importantly, well-executed.