Secretary Water and Power Ministry Younus Dagha has written a letter to Prime Minister Nawaz Sharif through which the latter has been requested to intervene and direct the Ministry of Finance to release 175 billion rupees power sector dues or else face a "full-fledged power crisis", according to a section of the press. However, what is noteworthy about the information in the letter is that the situation, extremely disturbing though it may be, has been a feature of Pakistan's power sector for more than a decade. The Ministry of Finance has been periodically compelled to disburse unbudgeted funds to enable Pakistan State Oil (PSO) to open letters of credit for fuel import to avert the possibility of a full-blown crisis. It maybe recalled that in early 2014, there was a fuel crisis in the country as the Ministry of Finance, focused on meeting its budgeted deficit target under the 6.64 billion dollar International Monetary Fund (IMF) programme loan, did not release the funds in a timely fashion. The 1.5 billion dollar 'gift' from Saudi Arabia averted the crisis; however at present with declining exports, rising interest payments to external and domestic creditors and failure to meet the overambitious budgeted revenue targets the Finance Ministry is unlikely to release any sizeable payment unless instructed to do so by the Prime Minister.

Dagha stated in the letter that 283.2 billion rupees of the power sector are stuck with the Ministry of Finance - 175 billion rupees on account of subsidies and 108.2 billion rupees on account of General Sales Tax refunds that are blocked by the Federal Board of Revenue (FBR) under the administrative control of the Ministry of Finance. And explained that "due to deficient budgeting of the subsidies the power sector subsidies have accumulated to 174.97 billion rupees resulting in non-payments to Independent Power Producers (IPPs) in this financial year along with increase in payments to Pakistan State Oil (PSO)". He warned that in the coming days this may lead to: (i) IPPs serving notice of sovereign default with the distinct possibility of drying up of their credit lines that would naturally reduce power generation; and/or (ii) PSO may default in furnace oil/Liquefied Natural Gas payments which would also lead to reduced generation.

It is relevant to note that the IMF in its last quarterly mandated staff review under the 6.64 billion dollar Extended Fund Facility dated 13th September 2016, emphasised the need for "further limiting the accumulation of power sector arrears and gradually reducing the outstanding stock to ensure the soundness of the sector." And the way forward as per the Fund review was a commitment by the Pakistan government to update "in consultation with development partners, their power sector arrears reduction plan (July 15, 2016 Structural Benchmark) to take into account changes in the privatisation strategy for Discos. In order to contain the accumulation of new arrears, the authorities will continue to strengthen Discos' performance by further reducing distribution losses, increasing payment collections and continuing to set quarterly performance targets... Staff reiterated the importance of establishing multi-year tariff framework in preparation for Discos' IPOs and called for swift resolution of the ongoing litigation and subsequently for the resumption of regular tariff notification while underscoring the importance of preserving the independence of the regulator." Clearly these commitments made by the government to the Fund in the last review are either unmet (new arrears are not being contained) or violated (the regulator Nepra has been brought under the control of the Ministry of Water and Power).

The Sharif administration's focus on enhancing power generation is not going to solve the problem of the circular debt. Increasing generation while the power sector remains embroiled in the debilitating circular debt due to non-payment of its dues by one sub-sector to another, including failure to clear bills by federal and provincial ministries/department, will not ensure that enhanced available supply would be distributed to the end-user.

Copyright Business Recorder, 2016