Islamabad: Circular debt in Pakistan has become a critical challenge for the country’s energy sector, with far-reaching implications for its economy, governance, and the daily lives of its citizens.
This escalating financial crisis, stemming from inefficiencies, corruption, and high energy tariffs, has left power consumers struggling under heavy burdens while threatening the sustainability of the nation's power infrastructure.
What is circular debt?
Circular debt in Pakistan refers to the accumulating financial shortfall within the energy supply chain, where one entity's inability to pay its obligations triggers a cascading effect of unpaid dues across the sector.
This cycle primarily involves:
Power generation companies (GENCOs): Unpaid by distribution companies.
Distribution companies (DISCOs): Struggling to recover costs from consumers due to inefficiencies, theft, or non-payment.
Fuel suppliers: Facing delayed payments, affecting power generation.
This chain reaction leads to a financial bottleneck that stifles investment, causes operational inefficiencies, and perpetuates power outages and load-shedding.
Scale of the crisis
The circular debt crisis in Pakistan has spiraled out of control over the past decade. As of 2024, it exceeds PKR 2.8 trillion (approximately $10 billion), according to government estimates.
This amount comprises unpaid subsidies, delayed payments to independent power producers (IPPs), and losses from distribution inefficiencies.
Key contributors include:
High system losses: Line losses and power theft contribute significantly to revenue shortfalls.
Delayed subsidy payments: The government often fails to disburse subsidies to cover the difference between production costs and consumer tariffs.
Overcapacity payments: Pakistan’s agreements with IPPs include capacity payments—fixed amounts paid to power producers regardless of whether the electricity is utilised.
Impact on power consumers
Rising tariffs: To offset revenue losses, the government has continually increased electricity tariffs.
Consumers are now paying some of the highest power prices in the region.
For many households, these high tariffs are unaffordable, leading to widespread dissatisfaction and protests.
Load-shedding and power outages: The financial strain caused by circular debt limits the operational capacity of power producers.
Frequent power outages disrupt daily life and economic productivity, especially for small businesses reliant on stable electricity.
Declining service quality: Distribution companies, unable to upgrade infrastructure or improve service quality due to financial constraints, deliver inconsistent and unreliable power.
Root causes of circular debt
Inefficient distribution system: A major portion of Pakistan’s circular debt stems from technical and non-technical losses in the distribution network.
Technical losses occur due to outdated infrastructure, while non-technical losses include power theft and billing inefficiencies.
Subsidy mismanagement: The government’s subsidy mechanism is plagued by delays and inefficiencies.
Instead of directly benefiting consumers, subsidies often exacerbate financial losses for power companies.
Corruption: Widespread corruption within the energy sector undermines operational efficiency.
From procurement malpractices to inflated contracts, these issues inflate costs and perpetuate inefficiencies.
Over-reliance on expensive energy mix: Pakistan’s energy mix is heavily reliant on imported fossil fuels, making power generation costs volatile and subject to international price fluctuations.
The lack of investment in renewable energy exacerbates this issue.
Flawed agreements with IPPs: The capacity payment agreements with IPPs lock the government into paying for unused electricity, adding significant financial strain to the sector.
Broader economic implications:
The circular debt crisis extends beyond the energy sector, affecting Pakistan's overall economic stability:
Economic slowdown: Frequent power outages hinder industrial output, reduce productivity, and discourage foreign investment.
Energy costs further erode the competitiveness of Pakistani exports.
Fiscal pressure: The government allocates substantial resources to bail out the energy sector, diverting funds from critical areas like education and healthcare.
Debt dependency: To manage circular debt, the government often relies on borrowing from domestic and international lenders, worsening the overall debt burden.
Pakistan’s circular debt crisis in the power sector is a multifaceted issue that demands urgent and sustained action.
High tariffs, inefficiencies, and corruption are not only burdening power consumers but also stifling the country’s economic potential.
A strategic roadmap that includes policy reforms, investments in renewable energy, and enhanced governance is essential to breaking the vicious cycle of circular debt.
According to sector experts, to tackle circular debt effectively, Pakistan requires a multi-pronged approach focusing on structural reforms, technological upgrades, and improved governance.
While the path to resolution is complex, the potential benefits—a stable power sector, economic growth, and improved quality of life for citizens—make it a goal worth pursuing.
With the right leadership, commitment, and collaboration among stakeholders, Pakistan can overcome this challenge and build a resilient, efficient, and consumer-friendly energy sector, as per experts.
According to a recent editorial published in one of Pakistan's leading English dailies, The Express Tribune, the issue of circular debt cannot be resolved through mere numerical adjustments or superficial measures.
It demands a thorough and strategic approach, with the primary focus on alleviating the burden on the masses and enabling the economy to regain momentum.
With Pakistan's power tariffs ranking among the highest in the region, expecting a revival in exports and industrial production under such circumstances is unrealistic, as per the editorial.
"It is simply unacceptable that capacity payments account for 70 percent of the electricity tariff, with the remaining 30 percent being attributed to energy costs," the editorial read.
