Minister says time of essence to reduce circular debt

ISLAMABAD: The unaffordable cost of electricity generation, circular debt build-up and leakages in the transmission system made the power sector financially challenging, finance minister said on Friday.

The newly-appointed energy minister Hammad Azhar directed the officials to follow a structured approach for timely completion of envisaged reforms.

“Time is of essence for reduction in circular debt, upgradation in transmission and distribution infrastructure and improved service delivery in the power sector,” Azhar told a meeting to review progress on reforms in the power sector. “Facilitating the common man is the top priority for the government.”

Long-standing deficiencies have pushed the energy sector to the edge. Over the past decade, they have resulted in an unsustainable stock of arrears (circular debt) that affects the entire power-gas/petroleum chain and weighs on the financial sector, budget, and real economy, according to an International Monetary Fund’s (IMF) report.

“The stock of arrears surged to 5.2 percent of GDP at end-FY 2020. This represents a 1.3 percent of GDP increase in the year. The Covid-19 shock directly caused a loss of about 0.3 percent of GDP to the distribution companies, arising from payment deferrals and a change in the consumer mix (from high-tariff industry to low-tariff domestic consumers),” it said. “With the Covid-crisis and some measures lasting into FY2021 and despite the partial collection of the deferred payments, an additional 0.4 percent of GDP in new arrears were accumulated until end-December 2020.”

IMF loan program for Pakistan supports power sector reforms by facilitating the clearance of arrears to independent power producers and the assumption of a share of the Power Holding Private Limited’s publicly-guaranteed debt to unlock critical medium-term cost savings in the power sector. The parliament was scheduled to convene to adopt amendments to the National Electric Power Regulatory Authority Act and the cabinet approved a circular debt management plan.

The meeting was told that the key focus of the reform process is to bring efficiency, cost effectiveness and sustainability in the system. A consultative process is followed to ensure all stakeholders are on board.

Minister for Industries and Production Khusro Bakhtyar, Special Assistant to Prime Minister on Power and Petroleum Tabish Gauhar, and others attended the meeting.

“Recent measures have helped contain the accumulation of new arrears in the energy sector. Vigorously following through with the updated circular debt management plan and enactment of the National Electric Power Regulatory Authority Act amendments would help restore financial viability through management improvements, cost reductions, regular tariff adjustments, and better targeting of subsidies,” according to the IMF’s report.