Pakistan’s power sector has been grappling with mounting circular debt, reaching Rs2.646 trillion by May 2023.
According to a report by the Ministry of Energy, this figure marks an increase of Rs394 billion from July 2022 to May 2023. The skyrocketing debt poses a significant challenge for the government and power sector policymakers.
The issue primarily stems from monthly inefficiencies in the energy system, specifically in generation and distribution, which translates to an added burden of Rs35.82 billion ($132.2 million) each month.
Despite attempts to alleviate the issue through a base tariff increase for electricity in July 2022, the debt continues to grow. Encouraged by the International Monetary Fund (IMF) to implement tariff measures to curtail the debt, the government has been unable to bridge the gaps in power-holding companies. However, the considerable tariff hike of Rs7.9 per unit didn’t halt the debt increase, which underscores that the root structural issues within the sector remain unresolved.
Breakdown of the Circular Debt
Data reveals that the total debt volume was Rs2.253 trillion at the end of the fiscal year 2021-22, which bloated to Rs2.646 trillion by May 2023. Payables to power producers also saw a surge of Rs420 billion to Rs1.771 trillion in these 11 months. Concurrently, state-owned generation companies (GENCOs) witnessed their payables to fuel suppliers rise from Rs101 billion to Rs110 billion.
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One positive development amidst the mounting debt was a decrease in the debt parked in Power Holding Limited (PHL) by Rs35 billion, bringing it down to Rs765 billion. However, the sector is far from relieved, as inefficiencies in power distribution companies (DISCOs) are a major burden. High losses and low bill recoveries continue to plague DISCOs, contributing to Rs374 billion in the circular debt. This significant contribution accounts for 95% of the total addition of Rs394 billion to the overall debt stock.
Addressing the issue of circular debt remains a significant challenge. While the government has imposed a debt servicing surcharge of Rs3.23 per unit, passing on the cost of inefficiency to power consumers, it is evident that more comprehensive solutions addressing the power sector’s structural issues must be implemented.
