By Haris Zamir
The inter corporate debt commonly known as circular debt issue echoed in the helm of affairs from last two decades or so where several energy ministers, finance ministers and trade ministers saddled made promises that soon the issue of debt would be resolved and we would take such measures that would help reduce the amount, but all failed and the menace has now become a major challenge for country’s economy.
The authorities completely failed to overcome the issue of the circular debt and on a war footing basis needed attention. The continuous pumping of the liquidity into the companies has been one of the major sources of the country’s financial aliment. To plug the deficit, the government has to borrow more funds from the banks through issuance of the treasury bills and Pakistan investment Bonds. Every 100-basis point increase raised the government borrowing cost by at least Rs 100 billion per annum.
The journey of rising circular debt started when the authorities due to sudden rise in the crude oil prices in 2008, touching $147 barrel forcing them to increase the petroleum product prices, buying at higher cost and selling and lower cost to save themselves from the backlash of the masses kept the local price unchanged or increase with a small margin. In these tenors the word called circular debt was not coined rather it has been termed as price differential claims. Though several companies still claimed that the overhang of dues under the similar head has not been and they are immensely suffering and facing difficulties to meet day to day working capital.
Following that menace of circular debt started creeping up and the amount in 2013 which was cleared by the then government totaling to Rs 503 billion was also mere an eye wash. Because authorities at that time converted debt, issuing long term bonds which itself had been a debt, but cleared some of the books. However, a major issue has been the price distortion, theft, losses and delayed decisions keep on piling up the circular debt issue.
Recently the current Minister of Energy Mohammad Ali in a press conference clearly explained the disparity and root cause of circular debt especially the gas sector. Two years back there was no such thing as gas circular debt but these days the economy has been facing the brunt of these outstanding dues arising from losses and thefts.
The Minister said that the price distortion in the gas sector has been the biggest jolt in piling of the debt. There has been a policy flaw which needs to be addressed and rectified so that disparity should be defused and the country should have one gas tariff system. Giving example said that the country has been importing LNG to plug the daily shortfall, the price of LNG worked to be Rs 3700 per mmbtu and consumers are receiving the gas at Rs 1100 per mmbtu, this resulted in a loss of Rs 350 billion, ie around Rs `1 billion a day. Moreover, the Minister for Energy explained that in North exporters are receiving gas at Rs 2700/mmbtu and industry around Rs 3700/mmbtu while in south exporters are getting at Rs 1100/mmbtu and non-exporters RS 1200/mmbtu, this required massing change over and balancing so that the daily losses could be recouped.
During the winter season the rich class received gas at Rs 1100/mmbtu, meaning nearly 50 million people as we have 10 million connecting receiving the supply through piped gas while people living in villages and towns running the home kitchen through LPG which cost them Rs 4500 to Rs 5000, this difference need to be addressed as the funds have been exhausted and reached the limit.
The circular debt has reached to almost Rs 2900 billion in the gas sector while in the power sector it has been around Rs 2500 billion, i.e. Rs 5400 billion both these sectors have swallowed the huge amount which resultantly had a chain impact on the economy in the general. Since long the World Bank and IMF have been arguing with the government or one of the key conditions to approve financing has been to reform the energy sector. Revamping and restructuring are common words for the energy sector where these institutions were always adamant that the government should reduce the amount of subsidies. For example, if the government allocated a subsidy amount of Rs 1000 billion in a federal budget almost 70 percent to 80 percent easily swept to the energy sector.
According to the IMF report published in July 2023 said that unfortunately, the circular debt stock in the wider gas sector has increased considerably and liquidity constraints have increased gas shortages, quickly becoming comparable to that in the power sector.
The main driver of this evolution was the non-implementation of regular end-user gas price adjustments in line with semiannual OGRA determinations of prescribed prices since September 2020.
GAS PRICE REVISION
The caretaker government has to take one of the toughest decisions during the term has been approving the gas price increase, recently announced in the Economic Coordination Committee meeting. According to a document received from the ministry the consumer gas prices have not been adequately revising consistent with the OGRA’s determination since FY2013-14. This has resulted in accumulation of revenue shortfall/tariff differential amounting to Rs 878 billion, i.e. SSGC Rs 450 billion and SNGPL Rs 332 billion as of June 2023.
Companies have already carried a revenue shortfall of Rs 46 billion for the period July to September 2023. On the other hand, the deficit on RLNG diversion of Rs 210 billion is anticipated during this winter, bringing the total shortfall to Rs 395 billion.
“With the recent approval the weighted average gas price is expected to go up by 53% to Rs 1,397/mmbtu from Rs 914/mmbtu earlier”, said Tahir Abbas, head of Research at Arif Habib. The gas tariff for non-protected domestic consumers would increase up to 173%, commercial by 136%, export industry by 86%, non-export industry by 117%, fertilizer by 14%, and CNG by 144%.
“We have estimated the revenue impact of the increase and our working suggests that the revised gas prices would create a positive GDS of Rs 57 billion”, he said. As per the estimated revenue requirement of SSGC and SNGP, the total revenue requirement is Rs 697 billion, while annual revenue would be Rs 755 billion due to rise in gas prices.
Fixed charges to ease off cash flows:
The ECC also approved fixed monthly charges, from Rs 10 per month to Rs 400/month, and for unprotected consumers, from Rs 460/month to Rs 1000/month and Rs 2000/month (depending on the slabs).
“We estimate a total additional impact of Rs 84 billion from this increase. The cumulative increase from GDS and fixed charges would be around Rs 141 billion”, Tahir said.
UNIFYING GAS PRICE
The Ministry of Energy is working on guidelines to be issued to OGRA to implement structural gas pricing changes implied by the weighted average cost of gas (WACOG) bill enacted in March 2022. Once implemented (with the then next OGRA determination), the WACOG will allow full cost recovery of more expensive imported RLNG and provide a more adequate price signal to guide gas consumption across all sectors and help reduce power generation costs.
Replicating the reform approach in the power sector and supported by international development partners, we are working toward: (i) devising a precise definition of CD for the gas sector (that includes oil but excludes power sector elements); (ii) compiling detailed and verified gas CD stock statistics; (iii) establishing a quarterly gas CD flow reporting system (also benefiting from improved data management and projection capacity); and (iv) devising a gas CDMP.
