Pakistan's Circular Debt: In Simple Words

The circular debt situation in Pakistan is a complex and persistent problem that affects the country's energy sector and economy. Circular debt is the term used to describe the cash shortfall across the power supply chain, caused by the inability of power purchasers to pay power producers, resulting in delayed payments, interest charges, and reduced power generation.

The current status of the circular debt is alarming, as it has reached Rs 2,631 billion as of April 2023, an increase of 7.38% from the same period last year. However, it is expected to decrease to Rs 2,374 billion by the end of the fiscal year, due to the government's efforts to allocate subsidies, revise policies, and settle dues.

The main reasons behind the circular debt are manifold, but some of the major factors are:

- Unreleased and unclaimed subsidies: The government has budgeted Rs 108 billion for subsidies for the power sector, but this amount has not been released or claimed, creating a gap in the cash flow.
- Interest charges: Due to delayed payments, the power producers charge interest on the outstanding amounts, which adds to the circular debt. The interest charges have reached Rs 76 billion in July-April FY23 and are projected to increase by Rs 30 billion by the end of the fiscal year.
- Non-payment of K-Electric dues: K-Electric, the sole power distributor in Karachi, owes Rs 102 billion to the national grid, but has not paid its dues, creating a liability for the power sector.
- Losses and under-recovery by distribution companies: The distribution companies (DISCOs) suffer from inefficiencies, theft, and low recoveries, which result in losses of Rs 93 billion and under-recovery of Rs 204 billion, respectively.
- Outstanding generation costs: The power generation costs, including quarterly tariff adjustment (QTA) and fuel cost adjustment (FCA), have not been fully recovered, leading to a shortfall of Rs 94 billion in July-April FY23.

These are some of the main reasons behind the circular debt situation in Pakistan, which requires urgent and comprehensive action to address the challenges and restore stability in the energy sector.

Sources:
(1) Govt to devise plan to reduce Rs2.3tr circular debt. https://profit.pakistantoday.com.pk/2023/10/21/govt-to-devise-plan-to-reduce-rs2-3tr-circular-debt/.
(2) Pakistan’s circular debt surges to Rs2.6tr in July-April FY23. https://profit.pakistantoday.com.pk/2023/06/22/pakistans-circular-debt-surges-to-rs2-6tr-in-july-april-fy23/.
(3) Pakistan’s circular debt surges to Rs2.6tr in July-April FY23. https://bing.com/search?q=circular+debt+situation+in+Pakistan.
(4) Proposed Programmatic Approach and Policy- Based Loan for Subprogram 2 .... https://www.adb.org/sites/default/files/linked-documents/53165-002-ld-03.pdf.
(5) Circular Debt: The Vicious Cycle – Pakistan & Gulf Economist. https://www.pakistangulfeconomist.com/2021/11/08/circular-debt-the-vicious-cycle/.

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