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ISLAMABAD: To hit the ground running — when it formally starts functioning this week — the new PTI-led coalition government is estimated to require an upfront settlement and restructuring of almost Rs1.9 trillion worth of liabilities and receivables of public sector entities.

A senior government official said the Pakistan Tehreek-i-Insaf government would have to make book adjustments and oversee write-offs — apart from resorting to different kinds of borrowing — to clear the stockpile of debt and liabilities of loss-making entities.

The official explained that a major portion of the liabilities piled up over time due to the widening gap between payables and receivables in loss-making companies, which is a classic example of inter-corporate circular debt. The rising debt may require a fresh liquidity of Rs600-700 billion.

That would also allow Finance Minister Asad Umar to project a higher fiscal deficit at the beginning of his term against the 4.9 per cent GDP booked in budget documents by the Pakistan Muslim League (PML-N) government. Mr Umar has already described the deficit numbers as unrealistic and has claimed that he would bring to the public knowledge data that he believes to be understated expenditures or over-stated flows.

Giving a general rundown on some of the major liabilities and receivables, the official said that power sector circular debt alone amounted to Rs1.150tr, which included Rs566bn worth of fresh flow of debt. The latter is mostly a result of short recoveries against billing, theft and line losses.

Of this, about Rs570bn is payable to independent power producers and generation companies — including the Water and Power Development Authority — for electricity they supplied to distribution companies through the National Transmission & Dis­patch Company and the Central Power Purchasing Agency. The amount also includes Rs110bn in capacity payments.

Another Rs583bn circular debt is parked in a special purpose vehicle called the Power Holding Company Limited. Although a major part of these liabilities is being financed through power tariff in the shape of financing cost surcharge against loans secured from commercial banks, about Rs155bn of fresh borrowing secured during the last stretch of the PML-N government is still unfunded.

Moreover, the liabilities of the Pakistan Inter­national Airlines (PIA) are also estimated close to Rs380bn, almost 123pc higher than the Rs170bn outlay five years ago. The official said that the entire amount was not required to be paid immediately, but the airline required regular rolling over of its outstanding loans against government guarantees to avoid default. It will require a major restructuring to put the national flag carrier and its balance sheet on an even keel.

Next on the list of loss-making entities is the Pakistan Steel Mills that stands practically closed since June 2015 due to gas supply being curtailed. The mill has payable debts and liabilities of about Rs230bn, besides Rs225bn in losses. Its closure has since caused almost $10bn worth of foreign exchange loss to the nation in the shape of steel and iron imports that could have otherwise been produced at home.

The official said that even though the Pakistan State Oil was a profitable firm — and the country’s largest in terms of revenue — its receivables were more than Rs335bn as of Aug 15. The number includes a recoverable amount of Rs159bn from generation companies, Rs77bn from the Hub Power Company (Hubco) and Rs46bn from the Kot Addu Power Company (Kapco).

The official explained that the government would have to manage funding arrangements for distribution companies so that they could make payments to independent power producers, including Hubco and Kapco. Getting these funds together is critical given the fact that a mammoth Rs820bn of power recoverable bills is outstanding against both public and private sector consumers.

In his press conference on Aug 7, Mr Umar had criticised the PML-N government for presenting an unrealistic budget knowingly and recklessly spending for political purposes.

He said that the previous government had borrowed heavily, which increased fiscal deficit in the last fiscal year to 7.1pc, instead of the targeted 4.1pc. He said that at present Pakistan’s situation was dire at best and required tough decisions to correct the course for the future.

Published in Dawn, August 20th, 2018