Circular debt to hit Rs2.43tr next year

The government on Monday approved a new Circular Debt Management Plan, revealing that the disclosed costs of theft and low bill recoveries are projected to mount to a staggering Rs637 billion in the current fiscal year, with the circular debt flow expected to persist despite recent electricity price increases.

According to the plan, rather than achieving any reduction in the current Rs2.393 trillion stock of circular debt, it will grow further to Rs2.429 trillion by June next year. This increase comes despite the fact that the government has raised electricity prices and allocated Rs1.2 trillion in subsidies. This indicates that the coalition government will not be able to resolve the power sector's inefficiencies.

The plan has also been approved based on questionable assumptions of a Rs300 per dollar exchange rate and an 18.44% interest rate, which could result in an undue financial burden on consumers.

The Economic Coordination Committee (ECC) of the Cabinet, chaired by Finance Minister Senator Muhammad Aurangzeb, approved the Circular Debt Management Plan 2024-25.

"The Ministry of Energy submitted the Circular Debt Management Plan for FY2024-25. The ECC approved the plan, which aims to reduce liabilities in the power sector and enhance financial sustainability," according to a press statement issued by the Ministry of Finance.

Endorsed by the International Monetary Fund (IMF), the plan is designed to improve the financial viability of the power sector. However, details show that neither the circular debt flow will be reduced to zero, nor will the National Electric Power Regulatory Authority's (Nepra) targets to curb losses and increase recoveries be met. The Ministry of Finance has voiced scepticism about the plan's viability, suggesting that Prime Minister Shehbaz Sharif's government may struggle to halt the power sector's financial decline.

The finance ministry stated it allocated Rs1.229 trillion in the budget to address power sector subsidies and reduce the circular debt stock. Out of this allocation, over Rs580 billion is earmarked for circular debt reduction. Nevertheless, the finance ministry informed the ECC that the circular debt stock is likely to rise by another Rs36 billion by the end of the year, adding that the objective of reducing circular debt can only be achieved once its flow is stemmed.

The finance ministry also objected to the persistent rise in line losses and under-recoveries. In the last fiscal year, these costs amounted to Rs591 billion. Alarmingly, the plan projects this to grow to Rs637 billion, despite already being above the permissible limit. This spotlights the single biggest failure of the Ministry of Energy. The finance ministry has urged the Ministry of Energy to expedite the implementation of reforms to reduce these losses.

The plan projects that costs due to low recoveries will jump from Rs315 billion last fiscal year to Rs419 billion—a staggering 33% increase—while the losses exceeding the permissible limits for power distribution companies are expected to decline from Rs276 billion to Rs218 billion. Rather than enacting substantial improvements, the government's approved new plan permits 90% recoveries and 17.3% line losses, far above Nepra's permissible 11.4% limit, which reflects the government's admission of failure by allowing these companies to incur higher losses up to 17.3%.

The plan further disclosed that an additional Rs1.08 trillion will be added to the country's circular debt in this 'business as usual' move, a gap the government aims to plug with increased electricity prices and Rs1.22 trillion in subsidies.

However, the plan appears unrealistic, placing an undue and excessive burden on consumers. It relies on an assumed exchange rate of Rs300 per dollar—despite the current stable rate of Rs278—and an 18.44% Karachi Interbank Offered (KIBOR) rate, even though the central bank lowered the interest rate to around 16% on Monday, the same day the ECC approved the plan.

The government has already raised electricity prices by up to 51%, which is expected to generate Rs302 billion in revenue this fiscal year.

In June 2023, the base electricity price, excluding all taxes, was Rs23.39 per unit, which has since increased to Rs28.44 per unit. By June 2025, the average base rate is projected to be Rs33 per unit, with additional adjustments for fuel costs and quarterly tariffs adjustments on top of the recent hikes.

The ECC was informed that last fiscal year, there was a net Rs83 billion or 57% increase in the circular debt flow due to "Discos under-recoveries, line losses above regulatory targets, and pending generation costs." Power Minister Sardar Awais Laghari had previously claimed publicly that circular debt did not increase in the last fiscal year, but the ECC was informed on Monday that the debt had climbed from Rs2.310 trillion a year ago to Rs2.393 trillion by June 2024.

This amount is now expected to rise further to Rs2.429 trillion by June 2025, indicating an additional Rs36 billion increase in the circular debt flow.