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Monday December 02, 2024

Comprehensive energy pricing, distribution overhaul to help tame circular debt

Even with measures circular debt is projected to grow by Rs36 billion by year’s end

By Israr Khan
November 18, 2024
A representational image of transmission line. — AFP/File
A representational image of transmission line. — AFP/File

ISLAMABAD: Despite ambitious reforms, Pakistan’s longstanding issue of circular debt remains a formidable challenge. The government has set in motion a Circular Debt Management Plan (CDMP) for FY2024-25, aiming to contain the swelling debt in the power sector—already a staggering Rs2.393 trillion.

With adjustments spanning tariffs, subsidies and operational efficiency, the plan underscores Islamabad’s commitment to reining in debt accumulation. Yet even with these measures, the circular debt is projected to grow by Rs36 billion by year’s end, signaling deeper issues that reform alone may not easily resolve.

Aligned with the IMF’s stipulations under its Extended Fund Facility, the CDMP has received approval from the competent authority — the Economic Coordination Committee (ECC). The Ministry of Energy’s Power Division, tasked with implementation, has laid out a multi-faceted strategy. While the plan sets out to cap debt flow and address inefficiencies, challenges within the distribution sector — such as DISCOs line losses and inadequate recoveries — pose substantial barriers.

The pattern of circular debt has fluctuated: a slight reduction of Rs27 billion was recorded in FY2021-22, yet subsequent years saw growth by Rs57 billion in FY2022-23 and Rs83 billion in FY2023-24. It appears Pakistan’s battle with circular debt remains, at best, a costly containment effort.

At the heart of the CDMP is a four-pronged approach. Scheduled base tariff hikes, quarterly tariff adjustments (QTAs) and fuel charge adjustments (FCAs) will see consumer rates inch upward.

Subsidy allocations amount to Rs621 billion for the fiscal year, with an additional Rs228 billion aimed specifically at alleviating debt pressure in critical sectors such as Balochistan’s agriculture and K-Electric’s operational areas. However, while these interventions provide some relief, questions arise as to whether the targeted subsidies alone can sustainably alleviate Pakistan’s cyclical debt woes.

Despite such efforts, the energy infrastructure continues to suffer from crippling inefficiencies. DISCOs, marred by losses and subpar recoveries, reported Rs236 billion in FY2023 that increased to Rs315 billion in cash losses in FY2024. It added in the circular debt, inclusive of non-recovery from AJ&K and Balochistan Agriculture consumers.

The CDMP’s objective is to achieve a 90 percent recovery rate, with intensified infrastructure upgrades and anti-theft campaigns. Yet, as Power Holding Limited (PHL) loans soar to Rs683 billion, the government’s strategy to absorb overdue liabilities into public debt suggests a longer-term fiscal strain on the state finances — a path that economists warn may lead to further budgetary constraints down the line.

Without the CDMP interventions, circular debt would have ballooned by Rs1.077 trillion in FY2024-25. The plan targets substantial reductions in debt flow; however, a projected increase of Rs36 billion remains inevitable.

As the Finance Division emphasizes, the weight of DISCO inefficiencies alone accounts for Rs637 billion, driven by anticipated line losses of Rs218 billion and under-recoveries of Rs419 billion.

These questions strike at the heart of Pakistan’s energy crisis. The plan may offer some immediate relief, but it’s clear the structural issues run deeper. Without a comprehensive overhaul in energy pricing and distribution, the plan may fall short of its goal to contain the mounting circular debt.

Subsidies, though necessary to shield vulnerable sectors, could indeed prove to be a temporary fix — merely a fiscal band-aid — unless paired with fundamental reforms to improve efficiency, accountability and financial sustainability in the power sector.

This challenge underscores the importance of restructuring Pakistan’s energy sector. Only by addressing systemic inefficiencies and aligning tariffs more closely with actual costs, can the government hope to curb the relentless rise in circular debt and lessen the burden on state finances in the long term.