Amir Khan

For over a decade, Pakistan's energy sector has been hampered by a concerning circular debt, which has now surpassed the Rs5 trillion mark, adversely affecting economic growth, and necessitating comprehensive reforms. Talking to WealthPK, Saifullah Chattha, former vice-chairman of National Electric Power Regulatory Authority (Nepra), said that the ballooning circular debt crisis lied in successive governments' failure to implement transformative changes within the energy value chain. “The deficit in power and gas circular debt, surpassing Rs5 trillion, is poised to grow at an alarming rate, strangling liquidity across the energy spectrum.” He said the root cause could be traced to the pervasive government influence across the energy value chain. “The government, along with its majority-controlled entities, monopolises the purchase of electricity and gas, while also dictating prices.” “An archaic cost-plus pricing methodology for electricity and an inability to price gas based on economic realities have resulted in a distorted market where subsidies and debt bridge the widening gap between consumer prices and production costs.”

Talking to WealthPK, Dr Nadeemul Haq, energy economics specialist at the Pakistan Institute of Development Economics, said that as circular debt breached the Rs5 trillion mark, the practice of deferring payments had led to a complex web of financial interdependence among entities in the energy value chain. “Short-term bank borrowings, intended to address liquidity shortfalls, further compromise the ability to secure long-term financing for crucial capital-intensive projects.” He emphasised that exploration and production companies faced hurdles in expanding production capabilities due to delayed government payments, exacerbating the country's reliance on imported oil and gas. “The consequences range from depressed equity valuations to strained access to external debt for essential investments.” He said the government's proposed solution involved injecting Rs710 billion into the energy value chain, starting with settling dues of power producers and gradually addressing issues faced by gas distribution companies as well as exploration and production entities.

“However, the plan, aimed at clearing circular debt, faces significant risks due to its intricate nature and the involvement of multiple entities.” Critics argue that the plan, repeatedly proposed over the last three years, lacks a foundation of deep reforms in the energy value chain. The absence of an aggressive overhaul raises doubts about its effectiveness, and the International Monetary Fund has expressed reservations given the already strained fiscal position. “For the new government, the issue of circular debt should be the top priority. Any proposed plan, whether through debt monetisation or swapping receivables with tradable government debt, must be swiftly executed alongside robust reforms, particularly in transmission and distribution,” Haq pointed out. The escalating electricity prices, coupled with a lack of reforms, pose a threat to economic growth, as demand stagnates or declines, showing an impending economic slowdown. As the new government has taken up the reins, tackling circular debt head-on and implementing transformative reforms across the energy value chain become imperative to revive economic vitality and ensure affordable electricity for consumers.

INPCredit: INP-WealthPk