FeaturedNationalVOLUME 19 ISSUE # 14

Power sector challenges

The rejection of the proposed plan for circular debt reduction in Pakistan’s power sector has raised concerns about the sector’s financial stability. As the circular debt continues to escalate, reaching Rs 2.6 trillion by October 2023, the government faces significant challenges in addressing the underlying issues.

The International Monetary Fund (IMF) has rejected both the circular debt reduction and tariff reduction plans proposed by the Ministry of Energy. The Fund does not endorse these plans. While there was clarity on the tariff reduction plan, conflicting reports from the petroleum ministry regarding the circular debt reduction plan may be attributed to stock market sensitivities.

Initially, the PTI government proposed a two-pager plan in 2021, followed by a slide deck from the PDM government in 2023. Currently, caretakers are preparing a comprehensive report in 2024, with credit attributed to the caretaker Ministry of Energy for their efforts.

In essence, the plan revolves around addressing the accumulating energy circular debt, primarily stemming from mispricing to consumers. The Sui companies responsible for transmission and distribution struggled to pay Exploration and Production (E&P) companies, leading to the mounting debt. The issue was exacerbated as E&P companies declared receivables as profit instead of writing them off. Settling these debts could potentially encourage future mispricing, creating a moral hazard and setting a precedent for addressing accumulating debt in a similar fashion.

This context may be a key reason for the IMF’s rejection of the proposal. IMF Mission Chief Nathan Porter’s statement explicitly mentions that the proposed plan does not tackle the underlying problems and poses fiscal risks in the Circular Debt (CD) reduction plan due to the chain of transactions. Moreover, the plan relies on supplementary grants, historically burdening fiscal accounts.

Although the Fund has rejected the plan, some close to the government believe CD stock settlement could still happen in the future. There are speculations that the government might consider it after the expiration of the current SBA and before signing the next EFF with the IMF. However, such a move could jeopardize talks for the next IMF program, requiring the government to tread carefully.

It’s worth noting that social media reports on February 10th wrongly claimed IMF’s consent to the CD reduction plan, refuted by the Ministry of Petroleum on February 11th through a tweet. Interestingly, the Fund had communicated its non-support for the plan on February 9. This misinformation may have influenced stock prices, prompting a need for government officials to exercise caution and ensure transparency when communicating information that directly affects stock prices on the market.

With the current plan rejected, the earliest possibility of its resurgence is in the budget of Fiscal Year 2025. In that budget, the government would need to disclose any budgetary slippages resulting from dividend payments to minority shareholders and specify the corresponding amounts returning to the government in respective accounts. While theoretically feasible, the chances of this happening are slim.

Pakistan’s power sector is grappling with a severe financial crisis marked by a circular debt that has surged to Rs 2.6 trillion by the end of October 2023, a 13 percent increase from the previous fiscal year’s Rs 2.3 trillion. The primary contributors to this escalation in circular debt include the sluggish release of subsidies, delayed tariff adjustments, high-interest charges, non-payment by K-Electric, poor performance of distribution companies, and the depreciation of the rupee.

Despite government assertions, the anti-theft and recovery drive, aimed at reducing losses and enhancing the power sector’s efficiency, has not been effectively implemented. Distribution companies have incurred losses of Rs 77 billion and under-recoveries of Rs 165 billion in the initial four months of the current fiscal year.

Furthermore, the government has not settled the dues of independent power producers (IPPs), which have accumulated to Rs 1.75 trillion. During the same period, IPPs have charged Rs 45 billion in interest on delayed payments. Despite the government’s claim of reducing circular debt to zero by the fiscal year’s end, experts remain skeptical and emphasize the need for urgent measures to reform the power sector and address the circular debt issue.

Rather than relying on the rejected plan, experts advocate for the government to concentrate on preventing the further accumulation of circular debt. This entails implementing comprehensive reforms, such as significantly reducing the high cost of energy, improving compliance, curbing theft and line losses, and enhancing the governance of distribution companies (Discos).

In conclusion, the rejection of the circular debt reduction plan underscores the critical financial predicament facing Pakistan’s power sector. As the circular debt reaches unprecedented levels, urgent and meaningful reforms become imperative. The government’s ambitious claim to eliminate circular debt by the end of the fiscal year is met with skepticism from experts. Instead, the focus should shift towards broad-based reforms, including cost reduction, improved compliance, tackling theft and losses, and enhancing the governance of distribution companies. The path to a sustainable power sector demands immediate attention and decisive action to avert a deepening crisis.