CIRCULAR DEBT IN PAKISTAN

GROUP MEMBERS

ASMA UROOJ

ASRA OBAID

HIRA NOOR

SAMEER AHAD HAQ

INTRODUCTIONCircular debt occurs when one entity facing problems in its cash inflows holds back payments to its suppliers and creditors.

 EXAMPLE:circular debt could also explain by the example, three persons are indebted, Mr. A owes Rs 100 to Mr. B and Mr. B owes same amount to Mr. C and Mr. C owes Rs100 to Mr. A. according to the current situation the net balance of all debts in between the three persons is zero.

KEY PLAYERS

KESE (DISTRIBUTER)

PEPCO AND HUBCO ( POWER PRODUCER)

PSO (FUEL SUPPLIER TO PEPCO AND

HUBCO)

Pak-Arab Refinery Ltd (PARCO)

This debt circle begins with the government as the

biggest debtor and ends with a government-owned

entity as the biggest creditor.

CIRCULAR DEBT REACHES 300 BILLION

The circular debt of Pakistan has reached

approximately Rs 300 billion pushing the

economy of the country to devastation.

The basic reason of the increase in the

circular debt is the countrywide theft of

electricity including the trend of

nonpayment of power tariffs.

CAUSES OF CIRCULAR DEBT

1) OUTSTANDING BILLS & PAYMENTSMany entities, various private and public sectors aredefaulted to pay huge electricity bills and other

payments.

2) TARIFFS AND SUBSIDIESGovernment is unable to pay the power tariffs

subsidies toelectricity companies.

3) LIQUIDITY TRAPWhen people expected rate of return from

investments insecurities and other assets become low,

investments godown.Circular debt increases due to lack of supply of

money inthe market.

CAUSES OF CIRCULAR DEBT

4) IMPORT AND EXPORT (TRADE BALANCE) Higher amount of import leads theFederal reserves to be getting low

whichfurther leads the government to

take loanfrom IMF (International Monetary

Fund)and World Bank.

5) GOVERNMENT POLICY The exporters are also not

facilitating properly. There is no sustainable job to

produce more electricity. Self consideration or Party

consideration of the government.

CURRENT SITUATION OF CIRCULAR DEBT IN

PAKISTAN Total capacity installed Pakistan has roughly

18,500 mega ward (MW). Around two-third (12,500 MW) is generated.

Around 6,500 MW of hydro-electricity can be available provided the hydro-electricity generating units.

Due to shortage of water in dams just one-third hydro-electricity generated now.

Because of high cost of raw material the cost of electricity generated from Gas and Oil is also very much high.

Cont..

Shortage in Oil and gas units cannot generate electric power according to their capability.

The circular debt in power sector is reached Rs.664.52 billion.

S. NO.

STAKEHOLDERS

RECEIVABLES PAYABLES

1. PEPCO Rs.299 billion Rs.367 billion

2. KESC 14.3 billion Rs.32 billion

3. PSORs.133.541 billion

Rs.139.169 billion

4. IPPs Rs. 775.2 billion Rs.516.7 billion

IMPACT OF CIRCULAR DEBT

COMPROMISED BALANCE OF PAYMENT

EFFECTED GDP

INCREASED LOAD SHEDDING

SHORTFALL OF CASHFLOWS IN ENERGY SECTOR

IMPACT OF CIRCULAR DEBT

SOCIAL EFFECTS

DECREASED INDUSTRIAL OPERATIONS

COMPANIES MOST AFFECTED BY CIRCULAR DEBT

• The most effected industry by circular debt is oil, petroleum,

power and electricity generating companies.

OGDCL

Attock Refinery Limited (ARL)

PAK Arab Refinery Limited (Parco)

Pakistan State Oil (PSO)

Shell

Sui Northern Gas Pipelines (SNGPL)

Karachi Electric Supply Company (KESC)

Hub Power Company

Kot Addu Power Company

Water and Power Development Authority (WAPDA Hydel)

Pakistan Electric Power Company (PEPCO)

COMPANIES MOST AFFECTED BY CIRCULAR DEBT

• The total receivables of these companies are Rs775.2 billion and payables are Rs516.7 billion.

• Oil and Gas Development Limited (OGDCL) has the greatest share of 115.5 billion out of 258.5 billion.

• SNGPL and Karachi Water Board have 13.4 and 1.2 billion net payables respectively.

Parco Rs 37.5 billion receivables

PPL Rs 22.2 billion receivables

GHPL Rs 9.6 billion receivables

SSGCL Rs 7.1 billion receivables

MEASURES TAKEN BY THE GOVERNMENT

The Pakistan investment bonds and Treasury bills both, worth of Rs.195 billion has been issued by State Bank of Pakistan.

The government has decided that Pakistan would have to pay off $1.2 billion to the IMF in the third and fourth quarter of the ongoing financial year.

The government is also thinking to privatize the Pakistan Railways.

From many of the defaulted private consumers, the PEPCO is being persuaded to recover its dues as soon as possible.

On electricity bills, a special surcharge from consumers is considering to be imposed by the government.

RECOMMENDATIONS• Raising the Tax‐to‐GDP ratio is a key pillar of the

government’s economic strategy. • In addition, other measures such as improving tax

administration and reinstating tax audits have been taken.

• Restructure key Public Sector Enterprises (PIA, PEPCO, Railways, TCP, USC, Pakistan Steel Mills, and NHA) to stop leakages caused by annual losses amounting to approximately 1.5% of GDP. The eventual aim is to turnaround these PSEs into profitable, self‐sustaining ventures under Public‐Private Partnership mode.

• Under reform of the power sector, electricity tariffs a full cost‐recovery tariff for the power utilities. Under a new Act of parliament, adjustment in tariff for changes in fuel prices for power generation has been made automatic.

• Checking inflation.• Bringing people to the centre stage, by

appropriately designed employment and training programs.

CONCLUSION