Sky-high circular debt

Pakistan’s surging energy sector circular debt is a pressing issue that demands swift action. The debt, which has now reached over Rs5.5 trillion, stems from a variety of factors, including inefficient power generation, poor distribution infrastructure and inadequate tariff policies. The circular debt alone amounts to over 5% of GDP and is rising at a rate of over Rs135 billion per month. This is despite the massive energy tariff hikes during the past year, which have significantly raised revenue collection while breaking the backs of poor and middle-class families.

Unfortunately, unresolved inefficiencies in the system and poor planning mean that despite the price increases, the government still sells gas and electricity at a net loss. The failure of price hikes to resolve the problem is another illustration of the need for the government to work on more holistic solutions that include measures such as new investment in plants to increase overall efficiency, improving transmission and distribution infrastructure, and reforms to the tariff policy. The government must also come up with a more effective power theft and ‘line-loss’ policy, while encouraging better usage practices among consumers. And while new green energy projects still look expensive, the government must seriously examine their lifetime potential and be willing to invest today to save tomorrow.

Given the government’s financial constraints, investment in renewables and green energy also need not be direct — subsidies and tax exemptions on residential solar panels, for example, are a practical option that would make installation cheaper without necessitating new spending. Such policies may also help reduce subsidies on energy consumption, which amount to around 1% of GDP — the highest in the region, according to the World Bank — even though there has been a massive decline in the number of recipients, from 92% to 62% of all consumers.

Published in The Express Tribune, April 8^th, 2024.

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