17 Best Investments in Pakistan for 2023
Discover the top 17 investment opportunities in Pakistan for 2023 with expert analysis to help you make profitable investment decisions.
TABLE OF CONTENTS
Before I go into detail here is the simplest explanation of circular debt in Pakistan ⬇️
Debt means an amount that you are liable to pay to someone.
Circular means since you can’t pay that debt and because of that the lender (one who has given you this debt) now can’t repay the debt he took from someone else!
Basic concept cleared? No? Try understanding it through a chain example:
A generic Circular Debt Chain Example:
- You bought groceries for Rs100,000. You don’t have money right now because of the economic crunch.
- You request the store to pay them in the coming month
- The grocery store doesn’t have money of its own, so stops Rs100,000 payment to the wholesaler
- The wholesaler sells to 100 shops and due to economic issues, all of the 100 retailers stop Rs100,000. Now the amount stuck in the chain is Rs10,000,000.
- The wholesaler doesn't have this much money so he can’t pay this 10mn to the distributor.
- Since the distributor sells his goods to 100 wholesalers and all of them face the same issue, the amount goes to Rs1bn.
- The distributor doesn't have this much money of his own so he stops the money flow to the producer or the company that makes these goods.
- Now the producer is short of Rs1bn.
This is how the chain of circular debt works.
Now the problem is, this is happening in the power and natural gas chain of Pakistan. Since the government is involved, it becomes a mess.
An average company can take care of the issue since they are agile enough to stop the credit and save itself but the government can't do it.
Let me first explain the circular debt of the energy chain in Pakistan.
Circular debt in Pakistan? Energy Chain circular debt?
When we talk about circular debt in Pakistan, it means the energy circular debt that Pakistan is facing.
Pakistan’s government want its people to not pay the actual power and gas cost. They subsidize it. But since the government doesn’t have the money to actually pay for it, power and gas companies have to pay for it.
This means billions of rupees that belong to these companies are stuck and it impacts their cash flows and dividends.
For example, OGDC and PPL cannot do exploration activities since they don’t have the cash to do it. Their entire cash flow is stuck in paying for these subsidies. This is why their stock prices, their dividends and their oil and gas reserves are falling every year.
According to multiline securities, a securities brokerage and research house in Pakistan says that by 2030 half of Pakistan’s energy will be imported.
Here is our step-by-step video explainer in Urdu, on how is circular debt created in Pakistan.
Circular debt explanation in Urdu!
Now the next question is. what is the impact of circular debt on the economy of Pakistan?
Impact of circular debt on Pakistan’s Economy
The biggest impact that Pakistan is seeing is through oil and gas exploration companies.
No oil and gas exploration
When the cash is short, oil and gas companies can’t explore more gas and oil while the energy demand is increasing every year. If we do not have local oil and gas, we will have to import it in dollars. this means that the rupee will continue to depreciate against the dollar and we will have to further increase electricity and gas prices.
The cycle will keep on going unless this core issue is resolved.
Pakistan Petroleum Limited or PPL is the biggest explorer of natural gas in Pakistan. Their gas production is falling by 4% every year and at this pace, they will not have any
The solution to this is that PPL gets cash and uses it to explore new gas and oil reserves. And due to no cash available to them to find new gas fields, they run out of gas in a few years’ time.
This means that Pakistan will have to import 2 billion cubic feet of LNG which again will be in dollars and hence local gas prices will reach a point where no company or citizen will be able to afford it.
This will impact all the industries that export or sell their goods in Pakistan. No one will be able to run their industries and everything then will have to be imported.
Textiles exporters will be hit the most that bring dollars into the country. they need gas to run their mills and without the unavailability of gas or expensive gas, they will lose their competitiveness.
The other impact is ever-increasing taxes on tax-paying companies and citizens in Pakistan.
Tax rates are going up
Think about this, if the government doesn’t have cash what will it do?
It will increase the tax rates so that they can have more cash for subsidies.
This makes companies operating in Pakistan uncompetitive. Who wants to run a factory when they have to pay more than 50% of their profits as taxes?
Pakistan has one of the highest income tax rates in the world. That too isn’t solving the problem. More taxes means factory owners have more incentives to work in cash and hide their profits.
How to reduce the circular debt
Reducing circular debt is very simple.
Charge consumers the true price of energy in Pakistan. This is the first and only step to reaching a non-circular debt economy.
The Government of Pakistan has been subsidizing energy prices in Pakistan for 30 years now and with a such high dollar-to-rupee parity it doesn’t make sense to do it any more.
Recently OGRA which is an independent body in Pakistan to decide gas and oil prices has recommended the government increase them by a 30-100%.
This is the first step.
The second step is to keep a check on the flow and if the theft increases, they should further increase the gas prices.
The government, with the IMF, is also devising a detailed plan to reduce circular debt in Pakistan.
Pakistan’s revised circular debt management plan
By revising, you would have understood that it has been happening and now the plan has been revised. But even the revised plan has problems.
So let’s understand what has the government been doing so far.
The government of Pakistan has been focusing on paying one-time cash to these companies so that the overall circular debt comes down.
This happened in 2013 when the government of Pakistan injected Rs500bn into the energy chain and the outstanding circular debt came down.
However, this isn’t the solution.
The solution is to keep increasing gas and power tariffs until the actual import price and prices charged to consumers are matched.
As per the latest numbers Pakistan needs to increase a whopping 100% increase in gas prices and approx 50% increase in electricity prices.
And we have to keep doing it!
See, Pakistan’s 70% of energy is imported. And when the rupee depreciates against the dollar (which happens every year), prices that the government charges for energy should go up. Otherwise, we will end up in the same situation again.
The new circular debt management plan which is being made with the help of the IMF, largely means that gas prices in Pakistan will go up. The government will increase gas prices by 30% to 100% and inject approx Rs500-700bn as one-time cash into the chain so that energy companies have the cash to operate.
However, the new cash will come back to the government since it owns a majority stake in companies that are impacted the most.
If you want to understand how will it happen and how will it impact the energy companies, here is a podcast where we invited Mr Sajjad Hussain, a research analyst from Alfalah CLSA.
Understanding the revised circular debt plan and dividends
This article only scratches the surface. Subscribe to our newsletter and explore the full spectrum of expert insights and practical tips to expand your financial horizons. Link ⬇️
Related Posts
24 Most Important Mutual Funds questions answered here!
Confused about investing in mutual funds in Pakistan? Check out this comprehensive guide with clear answers to frequently asked questions.
20 Most Important PSX / Stock Market Questions answered here!
Any and every question about investing in the stock market (PSX) are answered here!