ISLAMABAD: The government told the National Assembly on Monday that the circular debt accumulated over the years will continue to haunt governments in future.

In reply to a question from Malik Shakir Bashir Awan of the PML-N, the Minister of State for Production, Khawaja Sheraz Mahmood, said that despite the release of over Rs300 billion, the circular debt problem continued to be a major challenge for the government.

“The present government inherited the circular debt and because of financial constraints it will have no option but to transfer this financial liability to its successor,” he said.

Speaking on behalf of Finance Minister Dr Abdul Hafeez Sheikh, who rarely turns up during the question hour, Mr Mahmood in a written reply said that as of July this year, the circular debt stood at Rs373.236 billion.

To a flurry of supplementary questions, the state minister accepted on the floor of the house that the country was suffering because of mismanagement of the power sector, which needed an overhaul. He said increasing electricity tariff was no solution to the issue of circular debt.

According to the written reply, the major portion of inter-corporate circular debt emanated from non-payments by the Pakistan Electric Power Company (Pepco) and Karachi Electric Supply Corporation (KESC) to the independent power producers, oil marketing companies and refineries.

Explaining the measures taken to control circular debt, the minister said the government had transferred bank loan liabilities of Rs216 billion as of June 30, 2009, and Rs85.114 billion from the books of power companies and placed these amounts with the Power Holding (Pvt) Ltd (PHPL).

He said the power sector was allowed to transfer cost of electricity to consumers by increasing tariff by six per cent on Jan 1, by 12 per cent on April 1 and by six per cent on Oct 1, 2010.

In 2010-11, the finance division released Rs65 billion and Rs120 billion as tariff differential subsidy to Pepco over and above the budgetary allocation to overcome its operational shortfall and circular debt.

In 2011-12, an amount of Rs464.018 billion, including Rs151.250 billion as tariff differential subsidy and Rs312.768 billion for repayment of loans parked with PHPL, was released to Pepco on account of tariff differential subsidy.

During the current financial year, tariff differential subsidy of Rs10 billion has been released to Pepco. An amount of Rs142 billion was raised from banks as loan in February with the approval of the Economic Coordination Committee (ECC) of the cabinet and paid to IPPs by Pepco. An additional borrowing of Rs14 billion through Sukuk Islamic bonds is being finalised for Pepco and distribution companies to enable them to meet their liabilities.

The ECC also approved the issuance of term finance certificates (TFCs) of Rs82 billion by Pepco, which are to be subscribed by OGDCL. This would create additional space for Pepco and distribution companies to discharge their payment obligations.