Circular debt challenge

Published November 1, 2021

WISHES, unfortunately, are not horses, as the public knows. Hence there is scepticism around the official strategy to curtail the power sector’s circular debt or arrears that it cannot pay to power supply companies. The Power Division has set itself the tall target of curtailing the debt by about Rs425bn during the ongoing fiscal in spite of an increase of nearly Rs100bn in its stock during the first quarter of the year. How exactly are they going to pull it off? According to the proposed plan, the power sector authorities hope to achieve their targeted reduction in the circular debt primarily through an increase in the base electricity tariff for recovering Rs230bn from consumers in addition to taking other measures such as the settlement of outstanding arrears of private power producers. The strategy may help a bit in reducing the pace of debt accumulation in the coming months, but it remains unclear how these steps will slash a significant part of the government’s massive off-the-budget liability as is being claimed.

Pakistan’s power sector is in a serious crisis as signified by the circular debt. No matter what the government does the hole will keep getting deeper without serious governance reforms in this sector. Multiple upward adjustments in electricity prices for full recovery of costs over the last several years have only complicated matters; every tariff increase forces consumers to use less electricity as their ability and willingness to pay erodes. Expecting a miracle in the absence of adequate investment in the power distribution network of publicly owned distribution companies to cut system losses, effective measures to check electricity theft and complete recovery of bills from all consumers is foolish. What is important for the government is to encourage consumption of surplus generation to make capacity payments to power producers sustainable, and deregulate the domestic electricity market on the lines of international examples. Otherwise, the circular debt will continue to rise, rapidly or at a reduced pace, threatening Pakistan’s financial stability.

Published in Dawn, November 1st, 2021

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