Dealing with circular debt

The circular debt is back with full swing. There is no single number to count on; but signs are there to demonstrate that the menace is soon going to reach at a level which may warrant a settlement like what was cleared in 2013.

Last week, the power holding company silently issued a TFC to a few banks to raise around Rs50-60 billion, and it is no brainier to assume the objective is to clear over dues in energy (mainly power) chain. The over dues of companies are reaching at alarming level.

The red flag was raised in July 2017 (for details read “inevitable circular debt?” published Jun 2, 2017). The trade debts of 7 listed IPPs (HUBCO, KAPCO, KOHE, NPL, NCPL, LPL and PKGP) were around Rs206 billion in Mar13 which were reduced to mere Rs74 billion in Jun13 after the clearance of Rs161 billion in cash on June 28, 2013. The number picked up fast to reach Rs176 billion by Jun14, in just one year.

Then low oil prices did not let circular debt to reach too high for couple of years. But now, the windfall is over, and it is back with full steam. In terms of listed companies’ dues, there is a way to gauge the intensity of the problem i.e. by looking at the months of receivables in terms of months of revenues.

Published in Business Recorder, 6th April, 2018