The long-standing circular debt issue appears to be headed for partial resolution, with the Ministry of Energy reportedly finalizing a PKR1,263bn settlement plan (gross). This entails the government issuing PKR157bn against already budgeted Technical Supplementary Grant (TSG) to energy companies. In addition, the government reportedly plans to inject PKR745bn in energy companies, which will return a cumulative amount of PKR773bn to the government in form of dividends and taxes. The entire plan is subject to the IMF’s approval, which has been pushing for a credible plan to address circular debt as one of the SBA’s conditions. In our view, the TSG is already budgeted for, but the IMF will likely have to develop comfort over a temporary increase in the fiscal deficit before it gives the go-ahead. Markets seem to believe that this plan has legs, with state-owned energy companies gaining 11% this week.

Possibility of one-off bumper dividends

As per a press report which gave details of a proposed plan to address circular debt, OGDC PA, PPL PA, GHPL and NPPMCL are expected to receive PKR552bn, PKR126bn, PKR168bn and PKR100bn, respectively, to reduce circular debt stock. For this payment, a subsidy of PKR157bn has already been budgeted, FC charges on electricity bills will contribute another PKR77bn, and the government will inject PKR745bn cash into the energy chain. In follow-up, the state-owned companies in the energy chain will issue bumper dividends in order to return funds to the government, thereby neutralizing the impact on the fiscal deficit (the government owns 75% of OGDC and 68% of PPL). If this plan is approved, we estimate that OGDC and PPL may issue cash dividends of PKR123/sh and PKR46/sh, respectively. PSO, on the other hand, may not be able to make room for bumper dividends given its elevated borrowings.

IMF to have final say

Assuming the plan passes the finance ministry’s scrutiny, it should make its way to the IMF for final approval. While the SBA calls for the government to finalize a circular debt management plan (CDMP), we understand it cannot come at by way of new unbudgeted subsidies. It remains to be seen if there is any wiggle room in this – this plan can ultimately be slightly cash-positive for the government but with a lag between its cash injection and the return in the form of dividends and taxes. If this lag is acceptable to the IMF, this plan can potentially be green-lighted in our view. Otherwise, it will be back to the drawing board.

Courtesy – IMS Research