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Govt Has a Plan to Reduce Circular Debt by Rs. 300-400 Billion

The government is considering reducing circular debt by almost Rs. 300-400 billion by paying dividends to shareholders of energy sector companies.

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The government holds significant stock in key energy corporations and stands to profit significantly if dividends are declared.

Prime Minister’s Advisor on Finance and Revenue, Shaukat Tarin, recently led a meeting on the proposed matter yesterday. Low pay-out ratios and increasing circular debt, according to the petroleum secretary, have resulted in a considerable reduction in the share values of energy businesses on the Pakistan Stock Exchange, told an official during the meeting. Poor cash flows are impacting the listed energy businesses’ future growth and long-term viability reported Dawn.

In this regard, the Finance Advisor urged concerned energy companies to exploit their resources by running back schemes for a dividend payout policy. As per Tarin’s estimate, such a move would raise the stock market value of energy businesses while also reducing the circular debt by Rs. 300-400 billion. Within the energy value chain, the stock of outstanding bills is at around Rs. 2.5 trillion.

Tarin mentioned the advantages of declaring dividends and adjusting them against outstanding circular debt and global depositary receipts (GDRs), which are vehicles for raising capital by listing local companies on overseas stock exchanges. Declaring dividends will boost energy company valuations and allow the government to raise funds overseas by selling GDRs, he remarked.

Essentially, Tarin remarked on the exploitation of dividends in response to a speech given by the stockbroker-turned-industrialist, Arif Habib, at a ceremony on November 14 in Karachi. Habib mentioned in his address that the index was trading at a forward price-to-earnings (P/E) multiple of 4.9 in 2022, compared to the historical average of 8.1.

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The current P/E multiple, which indicates how much investors are prepared to pay for each rupee in profits, signals stock prices are subdued notably due to cash-flow constraints in index heavyweight energy companies.

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