Circular debt clearance 2.0

The inevitable has begun to happen. Government on Friday paid Rs53 billion to power producers, of which Rs40 billion went to IPPs. It plans to dole out Rs100 billion and Rs20 billion in “certain ways”, and another Rs14 billion in cash, as soon as the first week of April. That sums to Rs187 billion in the name of circular debt clearance.

It is not as huge as the infamous Rs480 billion payments made in June 2013. But back then, the government had just assumed office and wanted a berating space for two years, which it got, as circular debt accumulation till FY16 was zero. It now has little reason to think that long-term, hence a smaller, yet a considerable amount of Rs187 billion. The idea is to stay afloat till December 2018.

All of this came from none other than the man in charge for doling out money – Miftah Ismail, who was speaking to a TV talk show on Friday. Does the government have the fiscal space to free this much amount? That is not even the point, as it will find ways around, through more loans and papers. Even if it requires the subsidy amount to exceed the target – they would not think twice.

After all, the buck will be passed on to the caretakers and then the next setup. It may or may not be Miftah’s party again. So why bother? Bother because it is all aimed at getting the system running leading to elections in peak summers. “We will ensure there smooth running till December [2018],” said Miftah.

The idea looks to combat the rumours making rounds that the caretakers may deliberately go for excessive load shedding citing circular debt as the reason. Miftah minced no words in saying that the government will leave no reason for the caretakers to do load shedding. He was also quick to being home the ‘December’ point, when asked about low recoveries and distribution losses.

Miftah went on to stress that the government will ensure enough liquidity in the system to keep things smooth till December. So almost five years in the office and it had to come back to this? Injecting more subsidy and paying for inefficiencies, from the taxpayers’ money, to ensure they don’t get the flak come elections – is all what the government has to show for, after tall promises of energy sector reforms.

There is no denying there is more capacity to generate in the system, and no one can take the credit away. But the system does not run in isolation, and generation alone never has and never will solve the issues that surround the entire chain.

The Adviser to Prime Minister on Finance also did not miss the chance to criticize provincial governments, sans Punjab, for not ensuring adequate collection of electricity bills. Only that, distribution companies to date, remain under the federal government and the role of provincial governments is very limited, if any, at all. It would not hurt if he cares to explain what stopped them restructuring and privatizing the ailing DISCOs. But that would not earn him votes. Ensuring there is enough electricity till the elections would.

Recall that it was reported last week that the government is likely to take up the issue of entering a fresh IMF programme in April. Miftah also mentioned the IMF’s level of acceptance of circular debt up to Rs300 billion. The accumulated circular debt had reached Rs514 billion by December end 2017, according to IMF’s latest country report on Pakistan. Miftah used the same figures – hinting that the clearance to the tune of Rs200 billion would bring the level close to the IMF’s comfort.

Should this be read as preparations before those familiar doors are knocked again? The IMF too, would prefer a much lower stock of circular debt, before agreeing to a fresh programme. Had the IMF been more concerned about the real structural reforms, it could have shown the same with actions. In fact, as recent as March 2018, the IMF was seen recommending “additional surcharges to facilitate cost recovery until the underlying structural issues are tackled.” So it is all back to square one. Only that we have more generation capacity in the system, from which to make higher losses. And if Miftah or any of his peers are under the impression, that it would be smooth sailing this summer even after this partial attempt to clear the circular debt, they will do better to reconsider. Injecting cash to the IPPs will not transform the systems that are responsible to carry and distribute power units. There will be shortfall again. This shortfall was someone’s downfall last time.