Untargeted subsidy removal only way to end circular debt

Karachi: The issue of circular debt cannot be resolved unless the difference in power generation cost and its tariff currently averaging Rs2.5 per unit is removed, experts said.

“The existing circular debt to the tune of Rs100 billion would grow to around Rs220 billion by the end of fiscal year 2012 despite the government’s plan to raise electricity rates by two percent every month,” said Nauman Khan, an analyst at Topline Securities.

The current tariff hike of two percent per month and plans to further raise tariffs by 12-15 percent in the next fiscal would enable WAPDA to somewhat bridge the gap between generation cost and selling price, hence partially capping further accumulation in the circular debt, analysts said.

Retiring the country’s debt by issuing exchangeable bonds of OGDCL has already invited opposition from the National Assembly.

The parliamentarians say that it is not the privatisation of any entity, but a move to raise money for the government. Therefore, the National Assembly’s Standing Committee on Privatisation refused to approve this.

Umer Ayaz, an analyst at JS Global Capital, said that the cash proceeds from the exchangeable bonds and new equity offerings as planned by the Privatisation Commission would have provided the government funds to clear some of the circular debt, had there been no opposition.

In the next budget, the government is expected to reaffirm its commitment for the resolution of the energy crisis, which has stifled the economic growth.

The government is likely to announce broad parameters for the resolution of circular debt, which has strained the liquidity position of the downstream oil sector.

Finance Minister Abdul Hafeez Sheikh has hinted at stiff measures, but there has been no categorical statement regarding doing away with the untargeted power subsidies, the root cause of the mounting inter-corporate circular debt.

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