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Pakistan's fuel oil circular debt causing power shutdowns in summer peak

Singapore — Disruption to Pakistan's domestic trade flows of fuel oil due to almost $5 billion of circular debt is swelling stocks and causing severe power shutdowns during the country's peak summer demand season.

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Fuel oil accounts for close to 40% of fuel consumption in Pakistan's power sector, which is grappling with increasing load shedding and power cuts, a costly economic fallout for the industrial and manufacturing industries.

Circular debt in Pakistan's energy sector has been an ongoing issue since 2008. Debt-burdened power utilities cannot make timely payments to the country's oil suppliers, who in turn cannot meet their international payment obligations, leading to a credit crunch and supply disruptions.

Power producers are grappling with widespread electricity theft, payment delays and defaults by their customers -- including government offices and state-owned companies -- and high downstream subsidies that prevent them from recovering the costs of fuel purchases, power generation and distribution.

Pending payments have snowballed back to Pakistan Rupees 500 billion, or around $4.8 billion, since July 2013, when Pakistan's Prime Minister Nawaz Sharif wiped out close to $5 billion of debt from the energy sector through the issuing of bonds and some cash payments shortly after taking office.



POWER OUTAGES


Shrinking cash flows have forced power producers to either reduce or halt purchases of fuel oil and keep inventories below the minimum recommended levels.

They are required to keep sufficient fuel oil stocks for at least 10 days of supply and a maximum of 30 days, but the majority have stocks of only three to five days available, increasing the need for load shedding.

Pakistan State Oil sold 656,000 mt in May, down 2% year on year, and 647,000 mt in June, down 10%, data by the Oil Companies Advisory Council showed.

"Due to a cash squeeze, power companies have bought less fuel oil in May and June, despite these months coinciding with the peak of the summer demand season," said an official with a power company from the country's eastern city of Lahore.

The drop in consumption from the power producers has resulted in the rise of load shedding in the country, with consumers suffering power outages of 16 to 18 hours in May and June this year, versus 10-12 hours a year earlier, said the official with the power company.

The country's financial capital Karachi, experienced 12-14 hours of load shedding in June, compared with four to six hours a year earlier, he added.

On average, Pakistan's electricity demand was at 17,000 to 18,000 MW/day in May and June, whereas production was short by 6,000 to 7,000 MW/day, the government analysis showed.


LONG-TERM SOLUTION


Even if the government manages to clear the outstanding debt, a failure to timely revise electricity tariffs, prevent power theft and ensure the timely payment of bills would inevitably make circular debt reappear, along with load shedding and its costly economic consequences.

In order to resolve the circular debt issue, the government and the distribution companies need to focus on reducing the system losses and timely recoveries from customers, said Afaq Nathani, investment analyst at Insight Securities, a Karachi-based brokerage house.

"Although the government can provide some respite by a one-off liquidity injection, we believe a more sustainable approach at the operational level is needed to clear the menace," he added. "Downstream subsidies need to be reduced, and an audit system needs to be brought in place to ensure only bill-paying consumers are being provided with the service."

--Haris Zamir, newsdesk@spglobal.com
--Edited by Irene Tang, irene.tang@spglobal.com, and Abache Abreu, abache.abreu@spglobal.com