Fire-fighting measures

An inter-ministerial meeting with a one point agenda was held on the directive of the Prime Minister and under the chairmanship of Finance Minister Dr Hafeez Sheikh: how to tackle the inter-circular debt that was once again threatening the ability of Pakistan State Oil (PSO) to pay for critical imports.The decisions taken during the meeting included the immediate release of 24 billion rupees to PSO and 6 billion rupees to Independent Power Producers (IPPs) to enable them to continue operations. Another 30 billion rupees, it was agreed during the meeting, would be released before June 30, 2011 for the same purpose.These measures, there is general agreement, can be categorised as fire-fighting measures and do not contain any element of medium to long-term resolution of the inter-circular debt issue. The meeting also decided to divert 10 billion rupees per month from electricity bills of power companies to the PSO to ensure uninterrupted supply of furnace oil for power generation.This amount would be 11 billion rupees short of PSO’s monthly bill on furnace oil imports. In short, this measure too is unlikely to deal with the problem in its entirety and ensure that the problem is resolved for all times to come. It was, however, reported that the meeting agreed to form a working group that would comprise of additional secretaries of petroleum, water and power and finance ministries, who would co-ordinate the payment schedule for fuel suppliers in an effort to work out a mechanism to completely eradicate the 300 billion rupee inter-circular debt. This is unlikely to generate optimism within the sector or indeed within the public as the inter-circular debt problem has remained unresolved for the third year running.The government has been at pains to point out that the inter-circular debt problem was inherited. This is certainly true. The problem was acknowledged in 2008 and corrective measures were agreed with the International Monetary Fund under the Stand-By Arrangement. The former Finance Minister Shaukat Tarin undertook two major actions in an effort to resolve the problem. First, he issued term finance certificates twice – 80 billion rupees at a rate of Kibor plus 1.75 basic points in March 2009 and Rs 85 billion issued by the newly established power holding company against government guarantee at a rate of Kibor plus 200 basic points in September 2009.

These two issues were designed to reduce the banks’ claims on public and private sector enterprises and shift it to the government sector through a debt swap or, in other words, reduce banks’ advances to electricity bill defaulting entities and shift this money to their investments. Although, the issue of TFCs had no immediate cash impact on banks’ liquidity, it distorted their advances to the deposit ratio.This was why during the last meeting chaired by Tarin as Finance Minister banks opted not to attend. Second, Tarin noted in March of 2010 that the Ministry of Finance would adjust all outstanding electricity bills of government institutions from their account. This as aforementioned was reaffirmed during the recent inter-ministerial meeting but only to the tune of 10 billion rupees per month.Does this mean that there is no medium-term resolution of the issue? The World Bank in an effort to resolve the issue in the medium to long-term proposed power sector reforms that include: raising electricity tariffs by 32 percent, the government has yet to meet this commitment due to the obvious political fallout of such a decision; and to ensure an independent board of directors consisting of individuals with integrity and experience for the 10 distribution and transmission companies, which is still to be implemented.

In this context, it is inexplicable that the Prime Minister reportedly expressed anger over the increase in the inter-circular debt despite his instructions in April last year that it be wiped out in 45 days. The target date was as unrealistic as the target date set by the PML (N) for the government to implement its 10-point agenda.There was no way the inter-circular issue could have been resolved given the burgeoning budget deficit, the slash in the budget of various government entities including Pakistan Railways that disabled them from making the necessary payments and the resistance by the government to meet the World Bank conditions to achieve full-cost recovery in tariffs and follow the principle of meritocracy in selecting members of the boards of directors. The fault, as so aptly noted by Brutus in Shakespeare’s Julius Caesar, is not in our stars but in ourselves – Brecorder