Circular debt woes

Published May 21, 2024

THE alleged corruption and ineptitude of the country’s power bureaucracy is proving very costly. New official data shows that the government has failed to keep the power sector’s circular debt under Rs2.31tr as agreed with the IMF, with the debt stock soaring by Rs325bn to Rs2.64tr in the first seven months of the current fiscal. The circular debt’s unceasing surge, in spite of multiple rounds of electricity price hikes and fuel adjustments, shows that the authorities are yet to begin fixing the actual problems — poor recoveries, widespread theft, high system losses, generation costs, etc — that are dragging down the power sector. The situation belies the power ministry secretary’s claims of a ‘successful’ drive against power theft and defaulters that commenced last September. The growth in the debt stock has forced the government to commit to the IMF an increase of Rs5-7 per unit in the base tariff from July to restrict the circular debt growth in the next fiscal.

Residential customers, especially middle-income households, are the major victims of the power sector’s inefficiencies as they are forced to pay for theft, system losses, subsidies for powerful business lobbies and the like, on each unit they consume over and above the higher tariffs. According to a media report, the effective per unit electricity price for domestic consumers is Rs62, which is already double the existing base tariff thanks to various kinds of price increases and taxes built into the electricity rates over and above the base tariff, making power unaffordable for the vast majority. Now the government wants the citizens not only to pay a higher base tariff from July but also bear the costs that would result from significant reductions in industry tariffs. This cannot go on forever. Recently, we have seen violent protests over power prices in Azad Kashmir. Any further increase in electricity prices may ignite unrest in various parts of the country, as the income of ordinary people is no longer sufficient for their needs, because of elevated inflation and erosion in real wages. Power theft is also expected to increase with the rise in the cost of electricity. Price hikes are counterproductive as past experience and circular debt growth have shown. The solution to our power woes lies in implementing real reforms to fix the drivers of power price and debt growth.

Published in Dawn, May 21st, 2024

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