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Power sector debt piles up

KARACHI: Huge power sector losses pose a serious threat to the federal government’s efforts to keep the fiscal deficit within the revised target of 4.7 percent of the gross domestic product, official documents suggest.

The tariff differential subsidy (TDS) along with the interest payments on term-finance certificates (TFCs), which were issued for the resolution of circular debt, are estimated to be 30 percent of the overall fiscal deficit, according to official reports.

It may be pointed out that one-off settlement of the power sector circular debt in November last year has raised the public debt burden to 61.1 percent of the GDP at end December 2011, while the TDS for the current fiscal is expected to cross Rs200 billion mark.

According to budget documents, the TDS paid to WAPDA and KESC, along with the interest payments on TFCs, created with the Power Holding (Private) Limited Company, alone amounted to 1.8 percent of GDP during fiscal year 2011, having 27.2 percent contribution in the fiscal deficit.

During FY11, fiscal deficit rose to 6.6 percent against the budgeted target of 4 percent. This was primarily due to higher than budgeted subsidies including arrears of electricity subsidies on expenditure side.

Due to recent improvement in maturity profile of the domestic debt, the pace of debt servicing may register a slowdown during the third quarter of the current fiscal. However, this respite is likely to be short-lived as the interest payments on the PIBs, raised for settling circular debt, will start in the final quarter of fiscal year 2012, the State Bank of Pakistan (SBP) said in its latest quarterly report.

“In fact, interest payments on domestic debt are likely to post substantial growth from last quarter of the fiscal onwards, as around one-quarter of the entire debt stock has a maturity of one year, with payments scheduled in the upcoming year,” the report said.

In November 2011, the government borrowed Rs391 billion from commercial banks to partially settle circular debt through 12-month treasury bills and 5-year Pakistan Investment Bonds. This one-off settlement is a fiscal reform measure that will help government in making substantial savings on interest payments, it said.

According to details, out of the total amount Rs312.8 billion were raised for settling power sector claims, mainly the power holding company created by the government in mid 2009, for resolving the circular debt problem through the issuance of TFCs.

These TFCs were issued at a market rate of around 200 basis points above the KIBOR. The budget estimates for interest payments on these TFCs during fiscal year 2012 stood at Rs55.7 billion. To address this issue, the government decided to take these loans on its books by transforming them into a sovereign debt.

With this objective, a hefty amount of Rs391 billion was raised in November which entails interest payments of Rs22 billion in the second quarter of fiscal year 2013. Similarly for PIBs, the government will have to pay Rs11.4 billion in interest payments biannually for the next five years. In overall terms, the interest payment for both of these instruments will amount to around Rs44.5 billion, which is less than the payments projected only for the power sector circular debt in fiscal year 2012.

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