Remember the nursery rhyme? You do? Good!
And do you remember how it ends? Let me nudge your memory—“Pop! Goes the weasel”!
Oops, I have told you the (probable) ending of this story, which I have been cautioned never to do.
All right, I will be serious now.
Let’s say—A owes money to B, and B owes money to C, and C owes money to A. A doesn’t pay B, hence, B cannot pay C, so C cannot pay A. Thus, each of the three is simultaneously a lender and a borrower.
This is 'circular debt' (CD).
This situation is already quite weird, but what happens if the three of them are jointly involved in a business which keeps losing money? If, for whatever reason, the business has to keep running, then the losses will keep mounting. The result—the CD will keep increasing.
This is what has been happening in Pakistan, ever since 2006 when President Musharraf was in power.
So, what is the ‘business’, and who owes whom?
The business is electricity, i.e., the generation and distribution thereof.
Usually, power producers (PPs) generate electricity and sell it to distribution companies (discoms), who distribute the electricity to consumers, collect payment from them, and pay the PPs. The government acts as a referee, making sure that the consumers are not overcharged and that the system runs smoothly.
Unfortunately, in Pakistan, there are many leaks and glitches in the system. To name some major ones:
- Imbalances. Pakistan has an installed capacity of 44 giga-watts (GW) of power, and peak demand is 31GW. Sounds comfortable? Yes... but, transmission lines (between PPs and discoms) can only handle a maximum of 22GW. Hence, peak demand can never be met though adequate supply exists.
- Leakages. As much as 16% of electricity is lost due to poor equipment in the transmission system.
- Theft. Pakistan has long-standing “kunda” systems for stealing electricity, such as bypassing electric meters, direct hooking from power lines, reverse-connecting meters, etc. Nobody knows how much power is stolen in this way, all over the country.
- Non-payment. As much as 24% of the electric bills remain unpaid, and the offenders are usually the ‘untouchable’ big shots. One power minister had said that the biggest offenders are government organisations!
As you can well understand, the discoms don’t collect enough money to pay for the electricity that they buy from the PPs.
The government has a big role in this mess. The PPs are supposed to be paid based on two things:
- the electricity they actually generate and supply, based on fuel cost, running costs, salaries, etc., and
- the installed generation capacity – PPs are supposed to get a 17% RoE (return on equity) on the investments they have made to set up the power plants, irrespective of how much power they actually sell.
You can visualise the emerging scenario – PPs are supposed to get a big chunk of money, but discoms cannot collect anywhere near that amount from the bill payments made by consumers.
This is, perpetually, a loss-making business.
But the ‘show must go on’ because people must get electricity.
The government has to step in. It has two choices:
- hike the electricity tariff, or
- fill the gap by giving subsidies.
Hiking the tariff is a no-no – people will revolt. In fact, successive governments have shied away from increasing tariffs to anywhere close to realistic market levels.
Hence, subsidies have to be given to the discoms to enable them to pay the PPs.
But the government doesn’t have the money to pay these subsidies!
This gives rise to circular debt.
- Government owes money (unpaid subsidies) to the discoms.
- Since this money doesn’t come, discoms can’t pay PPs and hence, owe them money.
- PPs don’t have money to pay for fuel and thus, PPs owe money to the government (since fuel comes from government companies).
To compound the problem, the losses in the power business as a whole keep going up, year after year, because much of the fuel is imported, international energy prices keep going up, the Pak rupee depreciates, and all of that.
Hence, the CD also increases. Back in 2018, it stood at PKR1.8trn (trillion) (1.8 lakh crore). By June 2022, it had zoomed to over PKR4trn. The forthcoming budget envisaged that it would rise to nearly PKR6trn by the end of 2024.
Mind, this is not just an accounting problem. The system, as a whole, loses money and these losses are reflected in the CD number, which records a very real loss to the nation.
This is clearly an impossible situation, though it can be resolved by some (very painful) methods, such as:
- cracking down hard on power thieves;
- forcing delinquent consumers to pay all back dues or face disconnection and recovery by force; and
- increasing power tariffs to realistic levels.
In the latest negotiations with the IMF, the Pakistan government has been begging for a loan tranche of just US$1.1bn (billion), and has agreed to accept even the harshest pre-conditions laid down by the IMF, which the prime minister has described as 'unimaginable'.
(Rumour has it that the ‘unimaginable’ bit is not the increases in tariff, tax, etc—these were expected—but the use of the ‘collection method’ demonstrated by the crown prince of Saudi Arabia, about which I had written in my previous article.)
One of these conditions is the increase in power tariff, which will limit the increase in power CD to a 'mere' PKR650bn (PKR65,000 crore). Even the IMF has not asked for crackdowns on thieves and delinquents!
But why this desperate begging for just US$1.1bn? Apparently, the reason is that Saudi and UAE have refused to lend more money until the IMF loan is obtained, and the Pak government is hoping that, once the IMF opens its purse-strings, so will the ‘biradar’ countries.
But time is very short. Oil stocks will finish in 15 days. Money has to come now, right now, or else...
The running around the mulberry bush will come to an abrupt end, and we will come to the ending of the rhyme...
“Pop! Goes the weasel”!
(Deserting engineering after a year in a factory, Amitabha Banerjee did an MBA in the US and returned to India. Choosing work-to-live over live-to-work, he joined banking and worked for various banks in India and the Middle East. Post-retirement, he returned to his hometown Kolkata and is now spending his golden years travelling the world (until Covid, that is), playing bridge, befriending Netflix & Prime Video and writing in his wife’s travel blog.)