Govt strategies to reduce gas circular debt

ISLAMABAD: The government in order to bring sustainability and improve the country’s macroeconomic indicators has finalised a plan for containing gas sector circular debt (CD), which has estimated to have risen to Rs1.6 trillion.

“The proposed plan is a mix of non-cash book adjustments and tariff rationalisation that could be implemented only after the concurrence of the IMF”, said a government official, adding that the plan was subject to change with input from the IMF and the World Bank and its implementation would be gradual over a couple of quarters of the current year, reported Dawn Newspaper.

The plan was finalised on Aug 4 at a meeting presided over by former finance minister Ishaq Dar and subsequently shared with the fund. It seeks to bring sustainability to the energy sector through a reduction in the circular debt in the gas sector and help improve the country’s macroeconomic indicators and enhance economic growth.

Under the draft plan, the federal government would be injecting about Rs414bn of funds into the Sui Northern and Sui Southern gas companies through supplementary grants for payment of outstanding dues to gas producers – Oil & Gas Development Company Ltd (OGDCL), Pakistan Petroleum Ltd (PPL) and Govt Holdings Pvt Ltd (GHPL).

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Book adjustments and Rs414 billion injection would bring down debt by Rs543bn

Out of these funds, SNGPL and SSGCL would clear outstanding liabilities of about Rs225bn to OGDCL, Rs62bn to PPL and Rs127bn to GHPL. On top of these, OGDCL and PPL would arrange about Rs56bn on their own and partially liquidate some of the investment bonds.

In return, the three recipients — OGDCL, PPL and GHPL — would then provide to the federal government about Rs475bn dividends on their retained earnings, estimated to be around Rs1.44 trillion as of June 30, 2022. The government currently holds 100pc stakes in GHPL, 85pc in OGDCL and 75pc in PPL.

As an overall outcome of this book adjustment under which the government injects Rs414bn and gets back Rs475bn in dividend income, the overall gas sector circular debt would be cleaned to the extent of about Rs543bn.

Under the undertaking to the IMF as part of the $3bn Standby Arrangement for about nine months, the PDM government had promised a series of price-setting reforms for end-user gas prices that will ultimately also help reduce power generation costs, notably by ensuring that weighted average gas prices can help channel scarce gas resources to the most efficient gas-based power generator.

“We are also accelerating our reform effort in the gas sector that faces unsustainable CD dynamics and urgent liquidity pressures”, the Ministry of Finance had promised conceding that unfortunately, the CD stock in the wider gas sector had increased considerably and liquidity constraints had increased gas shortages, quickly becoming comparable to that in the power sector.

The IMF has highlighted that the CD stock in the gas sector has also grown rapidly and is now almost on par with the power sector.