Circular debt

Published June 28, 2014

IT has been with us for so long now that even the puns are getting worn out. Last year, the PML-N leadership proudly announced that they had finished the circular debt once and for all with a gigantic retirement of Rs480bn in one go. Then as early as September, headlines began to appear again, announcing the return of power sector receivables in amounts larger than Rs100bn. In January, the State Bank mentioned the growing circular debt as a threat to the country’s fiscal stability. The next month, in February, senior officials from the National Transmission & Despatch Company told a Senate committee that the circular debt had now surged to Rs180bn owed to power generation companies alone. That same month saw news reports that the IMF had asked for a complete audit of the circular debt to accurately determine who was owed how much, and how the receivables were being calculated. That audit is still under way while we have come nearly full circle to a figure beyond Rs300bn owed to power generation companies alone, with no clear idea of how to tackle the crisis.

Last year’s gigantic retirement of the circular debt has clearly failed to eliminate the problem. It was the third such attempt to resolve the issue once and for all. Each effort was bigger than the one preceding it. We can recall the Term Finance Certificates floated in 2009, amounting to around Rs60bn, and the Rs120bn odd retirement in 2011. Each time the problem returned with a new ferocity, and this time it is no different. Of course, power sector reforms are key to eliminating this problem reliably, because it is now clear that at the heart of this issue is the power bureaucracy and its inability to deliver. But it is also important to realise that the circular debt is an animal that grows in the dark. Lack of transparency in the power sector is the root cause of its stubborn resilience to reform. It should be made mandatory for the power sector managers to release operational and financial data on a regular basis, much like the water bureaucracy or the State Bank does. Ending the play of discretionary authority and bringing in professional oversight by independent boards are key to bringing efficiency to the power sector, and plugging its various leaks. Without underlying reforms, throwing money at this problem becomes a self-defeating exercise.

Published in Dawn, June 28th , 2014

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