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Circular 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 Rs 100 to Mr. A. according to the current situation the net balance of all debts in between the three persons is zero.

 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 nonpayment including of the power trend of

tariffs.

1) OUTSTANDING BILLS & PAYMENTS


Many entities, various private and public sectors are defaulted to pay huge electricity bills and other payments.

2) TARIFFS AND SUBSIDIES


Government is unable to pay the power tariffs subsidies to electricity companies.

3) LIQUIDITY TRAP
When people expected rate of return from investments in securities and other assets become low, investments go down. Circular debt increases due to lack of supply of money in the market.

4) IMPORT AND EXPORT (TRADE BALANCE)


Higher amount of import leads the Federal reserves to be getting low which further leads the government to take loan from 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 hydroelectricity 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. STAKEHOLDERS NO. 1. 2. 3. 4. PEPCO KESC PSO IPPs

RECEIVABLES Rs.299 billion 14.3 billion Rs.133.541 billion Rs. 775.2 billion

PAYABLES Rs.367 billion Rs.32 billion Rs.139.169 billion Rs.516.7 billion

SOCIAL EFFECTS

INCREASED PRICES

DECREASED INDUSTRIAL OPERATIONS

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)

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.
Parco PPL GHPL SSGCL Rs 37.5 billion receivables Rs 22.2 billion receivables Rs 9.6 billion receivables Rs 7.1 billion receivables

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

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.

Raising the Tax to GDP ratio is a key pillar of the governments 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.