Pakistan’s energy sector is infected by the circular debt crisis which is referred to as the cycle of non-payments throughout the energy supply chain. More commonly, there is a negative balance witnessed between cash inflows and outflows thus leading to inter-corporate debt i.e. circular debt. Multiple reasons can be cited for circular debt such as inefficient tariff subsidies, functional constraints, non-payment by state entities, the role of IPPs, and uncertainty in the international market. Therefore, this has corrupted the entire energy supply chain despite repeated government interventions.
Short-term maneuvers have not proved successful previously and it seems the current government is also facing difficulty in arresting it. With this, measures such as transparent tariff adjustments, reforms in the energy sector, improvement in billing systems, energy sector audit, energy conservation, and comprehensive future planning are the need of the time.
This article explains the intricacies of circular debt with its origin, factors, impacts, and lastly solutions.
What is Circular Debt?
The circular debt crisis is a recurrent phenomenon within the energy sector of Pakistan. In simplest terms, it means that there is a deficit witnessed between the cost of power generation and the revenue collected by the consumers at the distribution level. To add to the problem, structural and operational flaws of stakeholders (government, consumers, and power distribution companies) result in a cycle of non-payment of bills. This has been a persistent dilemma for Pakistan, as governments have tried to artificially lower electricity and gas prices through subsidized tariffs (i.e. financial assistance to companies to make service more affordable to the common masses) but since the government cannot fulfill its demands, distribution companies (DISCOS) and power generation companies (GENCOS) have to direct their meager revenues towards debt payoff. The debt burden is rotated between the biggest debtor i.e. PEPCO (a government-owned entity) and local entities such as OGDCL as the biggest creditors. This adds financial strain on the energy sector leading to load-shedding, reduced investment, and inefficiencies.
Timeline of Circular Debt in Pakistan
A historical analysis asserts that the circular debt crisis erupted in 2006. The government, owing to the decline in the Pakistani rupee and the increase in prices of goods and services, tried to artificially control electricity prices knowing that the oil prices in the international market were skyrocketing. In this regard, the tariffs awarded could not compensate the power companies as they were at a loss for trying to cover the burgeoning fuel costs for electricity generation. This led to a financial strain on distribution companies which could not pay their outstanding bills pending to the oil companies, thus importing oil. Therefore, this mess kickstarted a debt cycle that amounted to Rs. 111 billion by 2006.
Below is a table summarizing the circular debt crisis in respective governments.
| Timeline | Governments |
| (2008-2013) | PPP Government The 2008 global financial crisis was the ultimate catalyst in worsening the circular debt dilemma of Pakistan. In this regard, the PPP Government borrowed heavily from commercial banks to accommodate power distributers but underlying governance issues and insufficient subsidies led to a circular debt reaching Rs. 872 billion by FY2012. |
| (2013-2018) | PML-N Government The PML-N Government initially cleared circular debt amounting to Rs. 480 billion through direct liquidity injection, but outdated reforms led to its re-emergence in 2013. Tariff policy issues were not addressed timely. By FY2017, gross payables had reached Rs. 560 billion, with debts parked in Power Holding Private Limited (PHPL) increasing to Rs. 432 billion. |
| (2018-2022) | PTI Government Debt burden continued to surge as on PTI Government’s arrival it was Rs. 1.18 trillion and by April 2022 it reached Rs. 2.460 trillion. Similar short-term responses such as bank borrowing, reliance on subsidies, and industrial support packages were introduced but the root cause i.e. systematic issues were not catered to. |
| (2024 – current scenario) | PML-N Government The power sector continues to battle circular debt as the World Bank has found power and gas circular debts increasing by an average of Rs. 135 billion to Rs. 5.5 trillion (about 5.1pc of GDP) because of overdue generation costs, pending payments, and system losses. Moreover, this has also impacted talks with the IMF which are skeptical about any adjustments or reforms that could reduce the circular debt. All in all, the government has promised to address the power sector disparities through timely intervention. It remains to be seen that the efforts are implemented in letter and spirit. |
Key Contributors to Circular Debt
The factors responsible for circular debt are as follows:
Inefficient Tariff Subsidies
To reduce the impact of costly electricity on consumers, the government decides to provide tariff subsidies as a benevolent gesture. Its mismanagement can strain the power sector’s financial health. This is because the government’s promises fall short of the final revenue collection. In this regard, any delay can widen the gap between the cost of generating and distributing electricity thus causing a circular debt crisis.
Functional Constraints
Systematic obstacles are impeding energy transmission operations. The cost of delivering electricity is hindered by outdated power plants, line losses, and power theft. Therefore, a significant amount of electricity is lost before reaching the consumers, thus adding to the spiraling circular debt.
Non-payment by State Entities
Non-payment of electricity bills by industrial and commercial consumers adds to the growing problem of circular debt. Such deliberate default cases fall heavy on the energy sector which could have been avoided if responsible and transparent billing systems were streamlined.
Independent Power Producers (IPPs)
Instead of reforming the energy sector, private power producers have caused additional financial burdens on the state exchequer. Contracts with private entities are expensive in the long run as they must be paid fixed capacity charges whether electricity is required or not.
Regulatory Hurdles
Artificial control of electricity prices has also added to the equation as tariff adjustments are not sidelined with the actual cost of power generation. This is mainly caused by political and bureaucratic limitations thus causing a circular debt crisis.
Uncertainty in the International Market
Global price fluctuation in oil and gas can also indirectly increase circular debt as Pakistan is frequently low on fuel which is imported for power generation. This is also due to the declining value of the rupee which makes imported oil expensive.
Impacts of Circular Debt
The long-term repercussions of circular debt have limited the effectiveness of the energy sector. The circular debt constraints are felt by power producers, whose funds are directed from smooth operations, fuel procurement, and technological transitions toward paying the cascade of default payments. Adding on, despite, a tariff adjustment policy, the government fails to accommodate power companies, leaving additional strain on them to handle. Furthermore, circular debt discourages local and foreign investors from investing in crucial infrastructure projects and technological advancement. Since they are skeptical in terms of valuable returns they avoid the energy sector altogether. Therefore, this seriously hinders the growing energy demands.
Subsequently, power outages are a recurrent theme in Pakistan. Frequent blackouts are the result of limited power production due to financial limitations on the producer’s end. This hampers the daily life of the masses with impacts on industrial productivity and the broader economy. The energy sector is a vital organ of any country’s economy. Hence, if one organ stops beating, other functions are halted indefinitely. In a country’s case, developmental processes are halted which affects revenue generation thus hampering economic growth. For a country like Pakistan, such a drawback is suicidal thus it is necessary to cover the circular debt before any irreversible damage is done.
Way-Forward
The power sectors can be salvaged if the circular debt crisis is under control. For that, immediate measures must be taken. Gradual subsidies must be applied to reduce electricity costs so that power distributors are not impacted. The price adjustment must be close to the actual cost of electricity to avoid uncertainties and revenue shortfalls. The efficiency, transmission, and distribution of electricity must be improved through structural reforms. Better and Modern infrastructure, metal towers, transmission lines, and transformers must be set up by the government to limit line losses and power theft. In this regard, focus should also be diverted towards renewable energy such as solar, wind, and hydroelectric power which is the core component of a sustainable future.
Furthermore, to avoid delays in bills smart meters (i.e. at division, subdivision, and feeder levels), grid automation, digital payments, and pre-paid power meters must be established to aid in bill monitoring and collection. This would also identify repeated payment defaulters, thus making it easier for law enforcement to take stringent action against them. Similarly, the Government of Pakistan must make sure that regular audits are carried out on the energy sector’s financial transactions. Transparency and accountability are the cornerstone to smooth operations.
Lastly, the country’s energy crisis can be eliminated if proactive measures are taken to resolve the circular debt issue. In this case, anticipating potential obstacles can lead to better strategies in the long run and account for the country’s energy needs in the short term.
Conclusion
Analyzing the already weakened economic status of Pakistan, the contemporary power crisis, aided by soaring circular debt, has doomed the energy sector. Circular debt in this regard, refers to a cycle of unpaid balances between power entities which ultimately leads to a flurry of financial strain on the entire system. It not only impacts the power producers in the form of limited energy generation, transmission, and distribution but also government stakeholders and the normal electricity consumers. Successive governments have grappled with the complex issue but none has been able to target the root cause of the problem. Thus it is pertinent for the current government to set a resolute standard of regulatory policies and immediate reforms at micro, miso, and macro levels. To break the vicious cycle of debt, a national emergency must be imposed to announce the urgency of tackling the problem. After all, a thriving energy sector is conditional to economic progress which is the ultimate antidote to the current crisis.
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