The circular debt is back with full swing. There is no single number to count on; but signs are there to demonstrate that the menace is soon going to reach at a level which may warrant a settlement like what was cleared in 2013.

Last week, the power holding company silently issued a TFC to a few banks to raise around Rs50-60 billion, and it is no brainier to assume the objective is to clear over dues in energy (mainly power) chain. The over dues of companies are reaching at alarming level.

The red flag was raised in July 2017 (for details read “inevitable circular debt?” published Jun 2, 2017). The trade debts of 7 listed IPPs (HUBCO, KAPCO, KOHE, NPL, NCPL, LPL and PKGP) were around Rs206 billion in Mar13 which were reduced to mere Rs74 billion in Jun13 after the clearance of Rs161 billion in cash on June 28, 2013. The number picked up fast to reach Rs176 billion by Jun14, in just one year.

Then low oil prices did not let circular debt to reach too high for couple of years. But now, the windfall is over, and it is back with full steam. In terms of listed companies’ dues, there is a way to gauge the intensity of the problem i.e. by looking at the months of receivables in terms of months of revenues.
The trade debt of listed IPPs was 7.7 months of revenues in Mar13 which came down to 2.9 months in Jun13 after the onetime cash release by Dar. It started moving north since then and in Dec 17 it reached at alarming level of 12.3 months.

That is an astonishing number. The usual receivables are 1-2 months and these are not termed as overdue. However, any number more than that affects cash flows of companies. Now the debt is due for more than a year, and that is simply not sustainable.

Hence, the TFCs issue of power holding company was the need of time and it may provide some temporary relief. But the problem is of much bigger magnitude. There are many other companies operating in the power sector chain than the 9 listed IPPs.

A recent news item suggested that Sahiwal Coal Power Plant may close operating due to unsettled dues. The overdue amount of the plant has reached Rs20 billion within nine months of its operation. There are other unlisted IPPs as well which may be facing similar problems and the issue of renewable energy sources is no different.

The summer of 2018 has come earlier and the holy month of Ramadan is not far away. The power sector demand will be high In May and in the absence of clearing over dues, heavy load shedding is inevitable.

The irony of the matter is that power capacity is well in surplus, but distribution and transmission losses are impairing power generation companies to generate adequate power. The recent money raised by power holding company does not come directly in fiscal account, as it is a quasi fiscal public sector entity debt.

With the IMF programme likely coming up, the fund won’t allow such direct fiscal borrowing for clearing power dues. Thus, government may clear as much circular debt through direct or indirect fiscal sources by May end; as once the IMF is in, the power tariffs have to be revised up considerably to account for high losses (Read: Circular debt clearance 2.0, published on April 2, 2018).

And once the tariffs are up, the demand which is function of price would go down to make part of additional capacities idle while the capacity charges ought to be paid. This may result in a vicious cycle of overdue payments, tariffs revision and cut in power generation.