KARACHI, Feb 12: The government and the power sector may not be able to settle Rs150 billion circular debt issue by June 30, 2009 deadline set out by the IMF.

A senior banker said the stuck-up amount was large enough to create liquidity crunch in the banking system. Analysts and bankers said the electricity tariff hike was the only viable option to generate funds.

The government is in no position to extend the level of support required while its option to borrow from the State Bank has also been sealed by the IMF under the conditions attached with the $7.6 billion standby facility.

“In order to reduce power shortages, the government had released Rs7.5 billion to thermal power plants and OMCs (oil marketing companies) in January 2009,” said Farhan Mahmood, researcher at JS Research.

But the circular debt is again rising while the deadline to resolve the problem is approaching closer. Power producing companies were saving liquidity by investing less on fuel procurement which has increased the duration of load-shedding.

Mr Mahmood said the government had no option but to increase the electricity rates to raise fund and get rid of the menace of circular debt.

However, further increase in the tariff could see another round of agitation and political forces might use it to score points against the current economic managers. Besides it could further worsen the economic environment already under stress owing to global recession.

Bankers said the situation was also against the option to launch Term Finance Certificates (TFCs) to raise funds as the stock market lost attraction after hitting historic low. The most attractive scrips of power sector were being traded at much lower prices despite good annual results of OMCs and power producing companies.

Researchers at brokerage houses ruled out any possibility for success of TFCs. Bankers said the liquidity crunch has created space for launching of TFCs, but the loss of trust in stock business seized the fate of TFCs.

It was observed that the business community would reject any increase in tariff as they showed their opposition to tariff hike in recent past. The manufacturing sector has strong reservations against the tariff hike and high interest rates which they believe to be the real cause of slowdown of the economy.

The government finds itself locked over the circular debt issue as the slow economic growth has already pushed it to cut down the development expenditure. The cash crunch will not allow the government to extend sufficient amount for circular debt settlement.

A senior banker said government unlikely to get relaxation from the IMF regarding the June deadline as it got in case of interest rate. The government under the agreement with the IMF was bound to increase interest rate by 1.5pc at the end of January but the policy rate was kept unchanged at 15 per cent.