KARACHI, Dec 8 The government has planned to settle the circular debt which has reached about Rs200 billion, said official sources.

The sources say that the International Monetary Fund (IMF) has also given a timeframe to resolve the amassing circular debt that can reduce the capacity of the oil refining companies and the country will have to import more oil products by spending precious foreign exchange.

The problem of circular debt mainly emerged when the Water and Power Development Authority (Wapda) stopped making payment to fuel supplying companies and they stopped making payment to their creditors.

Also, Wapda is taking electricity from the independent power producers (IPPs) but not paying them which stuck up the rolling liquidity and the IPPs stopped making payment to their credit supplier.

The IMF has advised the government to prepare, by end-March 2009, a plan for eliminating the inter-corporate circular debt within the fiscal deficit target. The advice came in the recently signed agreement for $7.6 billion standby loan from the IMF.

The government is stuck up with the lower fiscal target of 4.2 per cent of GDP which compels it to reduce its spending and increase revenue.

At the same time the IMF bounded the government not to borrow from the State Bank which was the biggest lender to the government during last fiscal year.

The government has promised to bring down the borrowing from the SBP at zero which means it will have to relay heavily on borrowing through commercial banks, National Saving Schemes, bonds and foreign borrowing.

“The government is short of liquidity after the agreement with the IMF, and it will have to cut development expenditure and raise funds through private sector at much higher cost,” said an analyst.

According to annual accounts of different companies, the size of this debt was close to Rs198 billion as of November 2008,” said Farhan Mahmood, analyst at JS Research.

Had Wapda been financially sound or got the timely subsidies the impact would have not been penetrated through to the entire energy chain or may be the size of the debt could have been much lower, he said.

And that has brought these companies into tight cash flow situation at a time when cost of borrowing is also rising due to tighter monetary stance by the central bank.

“The major losers are refining companies,” he said.

Mahmood thinks this circular debt crisis has originated from Wapda, which is the largest electricity supplier (55pc share) in the country. It produces 40 per cent of the power from gas and furnace oil, which are supplied by SSGC and SNGPL and PSO and other OMCs. Moreover, the authority also purchases costly power from IPPs (like Hubco, Kapco, etc.).

Thus owing to sharp increase in oil and gas prices in last one year up to July 2008 with no major increase in electricity and gas tariffs, the cash-starved Wapda could not able to clear dues of Rs37 billion and Rs35 billion to Hubco and Kapco, respectively, as per the company accounts in September 2008.

Wapda`s payable to PSO is estimated around Rs18-20 billion. Thus, total payables by Wapda to these three companies were Rs90-92 billion.Hubco withheld its payment of Rs26 billion to PSO as it was not getting cash from Wapda. This resulted PSO stop paying dues of Rs40-45 billion to state-owned Parco (major oil product supplier to PSO). PSO also withheld payments to Pakistan Refinery (PRL) and National Refinery (NRL).

However, other than power sector dues, PSO also had PDC (Price Differential Claims) of Rs19 billion as of September 2008 from MoF (Ministry of Finance) which further aggravated PSO`s cash position.

The other chain of circular debt travel from Wapda to gas marketing and finally to exploration companies.

Wapda owes billions of rupees to Sui Southern Gas (SSGC) and Sui Northern Gas (SNGP). The SSGC owed Rs14.5 billion to Oil and Gas Development Company (OGDC) and Pakistan Petroleum (PPL) whereas SNGP owed Rs11.7 billion to both of OGDC and PPL.

“Not only this, both the oil and gas exploration companies had receivables of Rs21 billion from Attock Refinery (ARL), as of September 2008,” said Mahmood.