IT looks like debt is not the only thing that is circular in the power sector. History there also keeps going round and round in circles. The PPP government in 2009 undertook a large-scale retirement of the circular debt in its early days, in order to keep the turbines whirring, and the PML-N government began its term with one large, epic-scale retirement of all accumulated arrears in the power sector as well. Now we hear that the PTI government is similarly planning to raise up to Rs200bn through a Sukuk bond in order to retire at least a portion of the circular debt so as to avoid a potential liquidity-related shutdown. As previously, there is little alternative and the government has shown some innovative thinking in deciding upon a Sukuk issuance against assets of the distribution companies. And as before, the lurking danger is that the same circular debt will be back in a year, or perhaps two.

By now, arrears are not the only thing accumulating in the power sector. The weight of the evidence that these episodic retirements of the circular debt have little effect is also increasing. When we embarked upon this road earlier, it was with the Term Finance Certificates launched in 2009 under the stewardship of Shaukat Tarin, then finance minister. The amount was Rs89bn. Then came a swap of these TFCs with treasury bills, valued at around Rs170bn. Along the way, there were miscellaneous injections of liquidity from the budget, some valued at Rs40bn, some less. The PML-N managed to locate Rs482bn in one go from various government accounts to settle all outstanding payments at once, and did it before the end of FY2013, so the impact on the deficit was left on the previous government’s outgoing year. On this basis, it was able to misleadingly claim that it had brought the deficit down from almost 8pc of GDP to around 5pc. Regardless, by the time the party left office though, the circular debt was larger than it was when it had assumed power. Without carrying out the needed reforms, particularly in the governance of the power sector, such exercises are nothing more than palliative measures. The challenge before the PTI is clearly to bring about this reform, something the party has promised very confidently in its manifesto and in its campaign. That is when the real change will come into view.

Published in Dawn, December 22nd, 2018