Circular debt problem

The government’s failure to meet target has got the IMF upset

The failure of the government to meet the IMF’s target on circular debt has upset the IMF, though it is still not clear whether it has been upset enough to terminate the current IMF programme prematurely. However, considering that the power sector has been one of the IMF’s main concerns, this deficiency is a serious shortfall. Quite apart from the IMF’s concern, the debt has Rs 300 billion. According to the Power Division, the failure of K-Electric to make payments for electricity purchase and of certain distribution companies to make profits had resulted in this situation.

One of the possible consequences is the possibility of DISCO privatization not being so great a financial boon as the IMF cracks it up to be. The IMF is particularly keen on the privatization of the DISCOs, three of which go on the block at the end of the year, but the possibility of them imitating the already privatized KE, by not making payments, will throw the plan to eliminate circular debt further off course. There is also the somewhat frightening possibility of the plan itself not being adequate. It was prepared, after all, more to satisfy the IMF than anyone else. In fact, that is one of the problems with being on an IMF programme. Whether the power sector, or wider economic policy, major steps are being taken more to satisfy the IMF than because they are good for the country. The only debates with the IMF take place only when they step on someone’s toes. The biggest problem with the plan being a bad one is that the taxpayer will carry the can, not the IMF.

The true solution lies in renewables, especially solarization. One major reason for circular debt is the import of oil or gas for generation. Increasing the use of indigenous renewables would not only save foreign exchange, but create the fiscal space for a debt elimination plan. Hydel and wind would enable the government to lower tariffs, which is the main reason for solarization. It should be remembered that freedom from imports is needed in the energy sector. Circular debt should not degenerate into a stick for the IMF with which to beat the government over the head. It must be seen as an evil to be eliminated.