Circular debt: How much remains to be cleared?

Circular debt in the limelight again: We have attempted to estimate the remaining stock of circular debt as of Mar 31st, 2011 and have made the adjustment for subsequent receipts and further accumulation to arrive at balance as of May end.

Estimation methodology: Originating largely due to tariff differential subsidy and below par operations (in efficiencies) of Discos and Gencos, circular debt is largely a throw forward for the IPPs (to fuel suppliers), which makes “overdue receivables” of fuel marketers / distributors (OMCs and Gas discos) a reasonable proxy for the outstanding circular debt stock.

Adding net over dues of IPPs (overdue receivables less overdue payables) would make the estimate more precise.

May-11 end balance of circular debt estimated at PKR153bn: We estimate that outstanding circular debt as of Mar 31st, 2011 was PKR221bn. Adjusting for PKR89bn received by PSO in May-11 and assuming incremental accumulation of PKR10bn/month during April-11 and May-11, we believe circular debt balance would reach PKR153bn by end of May-11.
Circular debt in the limelight again

With payments of PKR89bn to PSO in early May-11, coupled with talks of likelihood of further reduction in the receivable stock by Jun-11, the circular debt issue has come into the limelight again. We have attempted to estimate the remaining stock of circular debt as of Mar 31st, 2011 and have made the adjustment for subsequent receipts and further accumulation to arrive at a balance as of May 31st, 2011.

Estimation methodology

Originating from under-recoveries and un-allowed T&D losses of discos, tariff differential subsidy and efficiency losses of Gencos, circular debt is largely a throw forward for the IPPs, being partly absorbed by OMCs, gas discos, refineries and E&Ps.

While precise calculations would require calculation of net receivables (overdue receivables less overdue payables) of each entity involved, we believe “overdue receivables” of fuel marketers / distributors (OMCs and Gas discos) provide a reasonable proxy for outstanding circular debt amount. IPPs have at times been using their balance sheet to fund overdue receivables from power purchasers. Hence, adding net over dues of IPPs (overdue receivables less overdue payables) would make the estimate more precise. Since almost all the OMCs and gas discos are listed, as well as the major IPPs (HUBCO and KAPCO) the public availability of financials would make the exercise more convenient.

May-11 end balance of circular debt estimated at PKR153bn

We have undertaken the following steps to estimate the balance of circular debt as of May31st, 2011:

Measuring Mar-11 overdue receivables of OMCs and Gas Discos: Both OMCs and Gas Discos do not precisely report their overdue receivables. Hence Elixir estimates have been used to estimate overdue receivables by calculating days’ sales outstanding (DSO) of each entity under normal course of business, estimating normal receivables and then estimating over dues.  Our estimates yield total overdue receivables of PKR189bn as of Mar 31st, 2011.





Adding Mar-11 “net” overdue receivables of listed IPPs: We have calculated end Mar-11 “net” overdue receivables of listed IPPs by subtracting overdue payables from the stock of overdue receivables. IPPs fund this “net” stock, either by short term borrowing or through own cash balances, and hence the impact is not transferred though to the fuel suppliers. Therefore the net overdue receivables of these IPPs need to be added to the receivables of fuel suppliers, in order to calculate the stock of circular debt as of Mar 31st, 2011. Our estimates yield a total of PKR32bn for the stock of circular debt being funded by IPPs, which takes the total stock of circular debt to PKR221bn as of March 31st, 2011.

Adjusting for PKR89bn paid in May-11 and further accumulation during April-May’ 2011: GoP released PKR89bn to PSO (by channeling the amount through Pepco and IPPs) on May 2nd, 2011, which the company utilized to make payments to refineries, international suppliers as well as pay government taxes. Hence Mar 31st, 2011 balance of circular debt needs to be adjusted for the said payments of PKR89bn. Although GoP made PSO and refineries clear its outstanding tax dues through a large portion of the paid funds, this is classified as reduction in financing of circular debt (an automatic result of reduction in circular debt stock) and hence the adjustment needs to be made for the gross amount (PKR89bn) instead of the net amount (PKR18-21bn). Also, further accumulation of circular debt during April-11 & May-11, estimated at PKR20bn, needs to be added to arrive at estimated stock as of May 31st, 2011. We estimate circular debt stock as of May 31st, 2011 at PKR153bn.

Some sources put the total amount released in May-11 by GoP at PKR120bn. In case the payment was indeed PKR120bn, then remaining PKR31bn would likely have either been paid to the gas discos via Pepco and gas based power companies or retained by IPPs. In that case, May end balance of circular debt would reduce to PKR122bn.


Economic & Political News

Reserves rise to USD17.07bn

Foreign exchange reserves rose to USD17.07bn in the week ending on May 21 from USD16.97bn the previous week, a central bank official said on Thursday. Remittances from overseas Pakistanis increased by 23.81% to over USD9bn in the first 10 months of the 2010-11 fiscal years.

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