The economic challenges for the government are not going to end soon among which the circular debt challenge is surging rapidly. It can damage the already Corona struck economy of Pakistan. More importantly, it will cost the power sector of Pakistan a huge loss on which the economy is highly dependent which can consequently result in the worst economic nightmare for Pakistan.
The Federal Cabinet Ministers of the government keep on making quite confident claims about a flourishing economy. They have been making perpetual claims about having the circular debt situation under control. But the reality contrasts with their claims because the circular debt has almost doubled ever since Imran Khan took over in 2018. It now sits at a hefty sum of 2.1 trillion PKR.
The government has been claiming that they are successful in bringing down the fiscal debts from 38 billion PKR to 10-12 billion PKR. But actually, the quasi-fiscal debts have increased at about 45 billion PKR per month from 2019-20.
The circular debt is a term which comes under the accumulative liabilities of the power sector. It occurs as a result of the defaults in payments by the power consumers, I-e; DISCO which extends to the power and fuel suppliers. These suppliers may include WAPDA, IPPs, and PSO, etc. To simply put it, circular debt is the circulation of debts in the power sector. It harms both the power companies as well as the economic stability of a country
Pakistan needs IMF’s support for a smooth inflow of foreign debt from bilateral and multilateral lenders in order to keep the debt servicing at around $78 billion in the foreign public debt. IMF suspended the loan program to Pakistan in January 2020. It remains postponed because of an increase in the foreign debt of Pakistan from 87% to 72% of the GDP (2019-20).
A greater challenge for the government than the circular debt is the designing of a road map for resolving the economic turmoil. This may require a considerable increment in tariffs and a better governance system. This is the IMF’s requirement from Pakistan to revive the loan program.
The government of Pakistan should put a counter outside Secretariat to keep a check on the growing circular debts with every passing day. The latest statistics have shown that the circular debt reached around 2.24 trillion PKR during the months of July-August for the financial year 2020-21. At the end of the first quarter of the fiscal year 2020-21, the circular debt stood at almost 2.28 trillion PKR.
Government is in a dire need of reviving the IMF loan program before the start of 2021. The government will have to take big decisions in this regard in which the unfolding of political events in the next few weeks will play an important role. The government recently took a step to mind the gap in the power sector. The Economic Coordination Committee (ECC) met in late September 2020 for deciding revenue for the power and gas sector.
The Special Assistant to Prime Minister, Shahzad Qasim gave a briefing on the circular debt reduction plan of the government. Around 180 billion PKR will be produced by increasing tariffs for the power and gas sectors. He told that out of the total 2.24 trillion are payable to the Power Holding Companies. Whereas, 830 billion PKR are payable to the Independent Power Producers (IPPs). As far as the receivables are concerned, 180 billion PKR is due on the K-Electric and Rs 567 billion is outstanding against the private power sector.
A meeting held by the Federal Cabinet on 6th October 2020 terminated the decisions made by ECC. On the other hand, the IMF is pressurizing the government to implement ECC’s debt reduction plan if they want the revival of the loan program.
IMF has issued certain conditions to Pakistan for the revival of its loan program. These include development in tax reforms, a clear-cut power production plan, a proper plan for targeted subsidies and the reformation of public-sector organizations
Another upcoming but inevitable challenge for the government in reviving the circular debt is the multi-party alliance recently formed by the Opposition. The Opposition seems unshakeable and united on their stance against the government. It is going to be a tough time for the government in stabilizing the economy.