KARACHI - The circular debt has exceeded rupees 300 billion during November 2008 on account of sharp rise in deferential claims against a state owned power company (PEPCO). In June 2008, the inter-corporate circular debt reached around 200 billion rupees. The outstanding debt held by oil marketing companies (OMCs), and independent power producers (IPPs) exceptionally increased during the period under review as the public sector power companies had developed large payable to (a) IPPs for the electricity purchased for distribution purpose, and (b) fuel supply companies for furnace oil and natural gas used in production of electricity. Ironically, IPPs are also facing difficulties in making payments to their fuel suppliers. Thus, facing pressures on their cash flows, IPPs, OMCs and public sector gas distribution entities too stopped clearing payments to their creditors and therefore leading to build up of inter-corporate debt. It is important to mention here that the issue of inter-corporate debt which emerged in FY08 became larger and more complex during initial months of the current financial year. State Bank in its report pointed out that during the initial months of FY09, circular debt situation worsened despite the fact that government has phased out subsidy on fuel prices. According to report, the issue of inter-corporate debt during FY08 rose mainly as the government was providing subsidy on fuel prices to domestic consumer and power utilities faced losses. Report also disclosed that the delays in the settlement of oil price differential (which refers to the differential between the international oil prices and the domestic consumer prices) claims by the government and the utilities forced a few OMCs to borrow from the banking system against government guarantees in FY08. Although the government was subsidizing electricity throughout FY08, this did not enlarge the outstanding amount of circular debt in the power and petroleum sector. This was because the volume of price differential claims of the major power utility in public sector remained low and IPPs had sufficient cash to meet payments to their creditors, probably due to the fact that in the budget for that year, government had embarked financing amount for the subsidy on electricity, report added. By definition, "inter-corporate debt is a situation where a power company withheld payments to its suppliers thereby resulting into a situation where suppliers also stop making payments to their creditors. It must be recalled here that under IMF support macroeconomic stabilization program the government is set to prepare, by end-March 2009, a plan for eliminating the inter-corporate circular debt within the fiscal deficit target. According to the details available s far, the plan will clearly identify all elements of circular debt, including (i) the identification of all debts owed and due among the corporations, duly reconciled; (ii) the determination of the validity of the claims; (iii) a schedule by which respective entities will discharge their liabilities to each other; and (iv) a timeframe during which the Federal Adjuster will use his powers to make adjustments, in case of failure, to adhere to the approved schedule.