ADB looking at circular debt

Updated February 12, 2019

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A report emphasises that strong political support for structural reforms is needed to stop circular debt flows.— Reuters/File
A report emphasises that strong political support for structural reforms is needed to stop circular debt flows.— Reuters/File

ISLAMABAD: The Asian Development Bank has warned that circular debt will continue to increase in Pakistan despite attempts by the government and assistance by the development partners to contain it. In an evaluation of the country’s power sector strongly, ‘Support to Pakistan Energy Sector 2005-2017’ report, the ADB has been recommended to work with Pakistan in addressing the issue of circular debt by targeting the underlying causes.

The report by ADB’s evaluation department suggests the bank must look into the implementation of the amended Nepra Act, and establishing an effective system of cost-recovery tariffs. Active policy dialogue and discussions, knowledge transfer and financial support are needed to address effectively the circular debt situation, said the report released on Friday.

It said that forthcoming additions to the generation capacity will also increase circular debt flows, and, unless reforms are made, the only solution for the government will be financing it through the Power Holding Private Ltd (PHPL), although the debt flow will keep coming.

The financial situation of the energy sector and the country is jeopardised by the circular debt problem, and it cannot be further ignored or delayed. Together with the debt parked at PHPL, the circular debt stock has reached Rs1 trillion, in fiscal year 2018, equivalent to three per cent of GDP.

The report emphasised that strong political support for structural reforms is needed to stop circular debt flows and ensure sustainability of the power sector. Considering the internal resistance for change within the power sector, significant reforms will never happen unless key decision makers at federal and provincial governments support the change.

ADB should provide analysis to address tariff and subsidy issues, through effective implementation of the amended Nepra Act; and support the increase of technical and operational efficiency of the distribution companies (Discos).

The bank should also support the government, the National Electric Power Regulatory Authority (Nepra) and Discos to design and implement a verifiable mechanism incorporating agreed performance parameters that would help promote efficiency and rationalise subsidies.

Published in Dawn, February 12th, 2019