News Column

Power crisis - Repercussion on economy

June 23, 2014

Hassan Yousaf Shah

The government paid Rs 470b soon after coming into power, to settle the outstanding circular debt and improve the power crisis. The loan of such tune had accumulated over five years in the and left a severe burden on the federal budget. However, present government managed to accumulate current circular debt of over Rs 500 bn within months of coming into power, which is seriously raising concerns across different fronts including budget, and political economy.

Recent years one of the key areas of concern for the government has been power crisis and amidst that the pressures on the finance bill to address the growing circular debt. Government’s inability to address the power crisis and linked debt crisis speaks volume. There are serious repercussions on the following sectors.

CRISIS & IMPACT ON BANKING SECTOR

The crisis is expected to eat into the money kept in the federal budget. Last year the government which had been borrowing heavily from domestic banking sector, partly to pay the circular debt, instead invented another way of borrowing. The TFC was not a good experiment and affected the banking sector and government’s credibility. Government was missing its coupon payments and this turned out to

Government which earlier issued TFC (term finance certificated) to borrow and then pay the debt, instead issued PIB and T bills of different maturity. This meant that government could now borrow and the banks could lend, but that loan would now be an “investment” and be placed in the asset side of the balance sheet. Hence their Advances to deposit ratio would not be distorted.

MAGNITUDE OF THE ECONOMIC CRISIS

There is a serious gap between what government is collecting from the consumers and what it is paying to generate a unit of electricity. The reason for this gap is another debate and yes government needs to assume a larger share of that responsibility than what it publically acknowledges. For the time being it is important to note that the current gap which we all know eventually becomes an enormous debt and finally it becomes the final liability of the government.

In the month of March 2014, the circular debt crisis had reached a new proportion when according to official ministry handout the debt had cross Rs 270 billion. The figure according to some had crossed Rs 330 bn in May 2014. However some sources claim this is just one side of the story. The Central Power Purchasing Authority (CPPA) had outstanding amount due as well, which were not added in the above figure. Sources on condition of anonymity claim that the true circular debt had crossed Rs 470 bn in the same month and it can be higher than Rs 550 bn by June end if the trend remains unchecked.

CIRCULAR DEBT IMPACT ON ECONOMIC FRONT

The circular debt has a serious impact on the budget and economy. For one, even if the government for a moment tries to settle it, as the government did last year by paying Rs 470 bn one time in August 2013, this debt will resurface within months. In short the debt cannot be settled and will resurface within months.

The reason is simple, the tariff differential, subsidy and recoveries post line losses, government pays more than it generates from the revenue. According to source, the tariff differential gap is Rs 6-4.5 per unit. The differential is simply due to rates NEPRA suggests, is much lower than line losses, subsidy recovery and delayed payments. This means that even if the gap is met this time around it will resurface within months.

The government has allocated nearly Rs 220 billion for the circular debt in current budget which if observed in the light of the past trend will not only be inadequate but it will also be crossed within few months. When the government has allocated only Rs 220 bn against Rs 500 bn outstanding it will have far reaching impact. This shortfall will eventually lead to crisis both at the economic and social front.

The economic implications for the above is going to affect the budget estimates and going to pull away the most of the resources which would have gone into other projects, is going to be dragged into this financial mess. Last year government had allocated Rs 800 bn plus for the development budget and in the end it could not commit 50% funds to the development side. This means that development projects like repair of roads, water sanitation, health and education projects were slashed. Social cost of reducing such projects outruns the economic costs.

Government is squeezed from both ends. The revenue side is decreasing and regressive taxes like indirect FED, electricity tariffs, fuel prices are raised, but still fall way short of meeting the expenditure. On the other hand expenditure side is increasing exponentially due to high debt servicing, extravagant government spending, has increased nearly 16% over last year. Additional Rs 250 bn burden at this point means that the funds will be diverted from somewhere they were much needed.

The debt is created when government which has guaranteed payments or buys electricity from IPPs or GENCOs is unable to pay back. This debt if remain unchecked or not paid back actually clogs the financial system. Government borrows from both local and international sources to pay the debt. As revenue will short fall like last year hence in order to address the shortfall government will once again borrow. As government has exhausted from domestic sources, government cost of borrowing from international source runs anywhere from 12%-18% (subject to assumptions, nature and conditions of the loan) which has a serious impact on the debt servicing section and invariably the budget deficit.

Currently government has proposed Rs 1.3 trillion for debt financing out of the total current expenditure of Rs 3.9 trillion, which is going to increase because foreign debt repayment is not included in the above expenditure. Plus the government will be falling short on its commitments yet again.

The budget figures need to be adhered else the government has a financial mess to manage. The current long term debt has already swelled to over Rs 16 trillion from Rs 14 trillion under year ago. The GDP to debt figures have to be consolidated for 2014-15 however, as estimated it is clearly close to 64%, a figure which is well beyond the acceptable levels for the IMF. Government budget deficit of Rs 1.7 trillion will spread much wider from the looks of it even before the first month of the budget year.

This will again imply that IMF will put pressure on the government circles to bring this number down. Economically this means that the debt will pile up in few months, and additional loans will need to be secured to pay this debt off. Most likely the estimated are going to be wrong hence the budget will undergo revision in coming months. Needless to highlight that any additional debt will have impact on debt servicing, and

IMPACT ON IMF CONDITIONALITIES

IMF has been suggesting “proportionate” load shedding based on the recovery system. That is to say the areas which pay dues on time and account less for line losses should face less load shedding. This suggestion clearly shows that the fund realizes the line losses are not getting sorted out and power theft is something which government cannot or perhaps does not want to solve on its own.

The Government rather borrow heavily from fund or local banks rather than solving the line losses, recovery of bad loans or the theft issue. The fund has been pressurizing the government to raise the tariff rates to ensure that the government can pay the scheduled installments. Raise in tariff also means that it will place discriminatory pressure on the poor and rich alike. Rich will bear, influential will cheat while the poor will suffer immensely in this scenario. Whose the winner? Anyones guess is as good as mine.

IMPACT ON THE SOCIAL FRONT

The social costs outrun economic, and financial costs by far and many. The cost of borrowing additional funds means that the budget deficit will increase hence funds from much needed social projects will be diverted to pay the circular debt. Two, current mix of oil and fuel also means that the government does not have short term solution so it asks IPPs hence it buys expensive electricity which goes to hand few investors. As the circular debt resurfaces so does the fact that the loadshedding will not go away in the summers as everyone is witnessing the load shedding these days.

If the load shedding is tilted towards the rural side, agricultural input will lose and social costs are immense. If the load shedding is carried out on the industrial side then the daily wager or common laborer is going to be facing immense economic difficulties. Agricultural income in the GDP is already on the decline and this also means that the overall GDP is about to suffer thanks to one factor alone that is the electricity shortfall. The plight of the common farmer is going to be worst this year compared to last year.


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Source: Nation (Pakistan)


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