Money Matters

Controlling circular debt

Money Matters
By Mohd Sheroz Khan Lodhi
Mon, 07, 22

Circular debt occurs when one entity facing problems with its cash inflows holds back payments to its suppliers and creditors. Thus, problems in the cash inflow of one entity cascade down to other segments of the payment chain, resulting in operational difficulties for all service providers in the sector, none of whom are then able to function at full capacity, spawning unnecessary load-shedding.

Controlling circular debt

Circular debt occurs when one entity facing problems with its cash inflows holds back payments to its suppliers and creditors. Thus, problems in the cash inflow of one entity cascade down to other segments of the payment chain, resulting in operational difficulties for all service providers in the sector, none of whom are then able to function at full capacity, spawning unnecessary load-shedding.

The current government is unable to provide subsidies to power distributors because of its financial difficulties and the weak economy. In turn, the power distributors lack the funds to pay the power producers, who are unable to purchase the fuel necessary to keep the plants operating and fail to provide the electricity due to the customers, who frequently choose not to pay their bills for electricity that isn’t working.

Consumers are then required to pay taxes back to the government, completing the debt cycle. As is evident from the current situation, there is no easy solution to break this circle of debt and restore electricity to the people of Pakistan. An injection of money needs to occur somewhere in the circle to keep the money moving, but from where will it come?

The unending fiasco to contain the circular debt has been an exemplification of the fact that the reasons behind the warped system have not been addressed effectively. As a consequence, the power sector’s circular debt has reached Rs2.5 trillion, showing a 10 percent growth over the last fiscal year. Undoubtedly, circular debt should not be a marshland for policy makers in today’s technologically advanced world.

Power managers at the federal level can ensure a circumspect but enduring cut in the circular debt by adopting short and medium-term multi-faceted innovative approaches in a bid to control power losses, aside from taking long-term steps to reduce the cost of generation to make energy affordable. Most of the losses are recorded on the financial side and mainly comprise electricity theft accompanied by power distribution companies’ losses due to corrupt and inept management.

Technical line losses due to poor conductors, aged grid, transmission and distribution infrastructure, infrequent maintenance, and resistive losses (losses due to resistance, atmospheric conditions, and heat) have reached 20 percent. Studies reveal that Pakistan’s overall circular debt could reach Rs4 trillion by 2025 if these technical and non-technical losses are not handled and controlled. Let’s focus on this persistent gridlock in the power sector.

The government’s only remedy is to raise the tariff (electricity bills have gone up by 100 percent over the past four years). But it is clearly not working as circular debt continues to swell. As previously stated, two things must be accomplished: reduce transmission and distribution losses and collect nearly 100 percent of the billed amount.

The main reasons for the impotence of the government to reduce transmission and distribution losses are the inadequate attention paid to the upgradation of infrastructure and the focus on power generation. Pakistan has achieved surplus generation capacity, so the focus should be directed to the transmission and distribution segment of the power sector. Modernizing the tumbledown transmission and distribution infrastructure, the government lacks the resources to upgrade infrastructure on its own.

Therefore, the inclusion of the private sector is imperative, which could be achieved through the privatization of DISCOs. The revenues generated from the privatization then could be utilized for the upgradation of infrastructure, synchronization of the frequencies and speeds of power plants and transmission and dispatch (T & D) networks, improving the conductivity of the conductors (wires), and institutionalized mechanisms for the maintenance of the system can pave the way for reducing the T & D losses to a sustainable level.

In conclusion, the power sector and, in the long run, Pakistan needs a competitive power sector, one that is governed by economics, not a convoluted web of regulations, subsidies, and surcharges. The government must stop “subsidizing” falsification and corrupt practices and must limit their role to being a competent regulator.

The resolution of circular debt is necessary as this will ease supply constraints. The task is testing since it requires the outstanding stock of circular debt to be cleared before plugging further build-up of circular debt receivables. One key lesson, as previously discussed, is that power subsidies can only be sustained if they are explicitly acknowledged in the fiscal budget; otherwise, the economy will continue to suffer from the indirect cost of these subsidies. The circular debt is a serious hindrance in the way of sustained growth and development in Pakistan. The above-mentioned reforms can go a long way towards controlling the causal nexus of circular debt.


The writer is a financial analyst