NationalVOLUME 14 ISSUE # 21

The stubborn circular debt

The power sector continues to be jolted by circular debt. Circular debt, which is basically an accumulation of unpaid bills, runs through the entire power-generation chain. Power distributing companies cannot make recoveries from consumers and, in turn, cannot clear their dues owed to power producers.  This results in the latter defaulting on payments to fuel suppliers and refiners.

It may be recalled here that the previous government had committed to the IMF under the Stand-By-Agreement that it would prepare a plan that would clearly identify all elements of circular debt, including the identification and reconciliation of all debts owed to corporations, checking the validity of the claims, a schedule for the clearance of all liabilities by the respective entities. But none of the commitments were met with the result that the power sector continues to be a major focus of concern for the International Monetary Fund (IMF).


At a recently held meeting of the cabinet committee on energy resources rationalization, serious issues came up regarding the exact amount of circular debt. It is further reported that the federal and provincial governments were unable to reconcile the figures for electricity bills against provincial governments even at the forum of the Council of Common Interests (CCI).

Needless to say, the power sector remains in crisis due to circular debt, which in turn, is a consequence of serious structural issues which include tariff rationalization, tariff differential gap, transmission losses and non-recovery of dues.  The government has not only been able to control losses but, according to the latest estimate, the overall recovery of the power sector against each 100 units purchased from power producers has declined to 67 units. Needless to say, as long as the transmission losses are not controlled and dues recovery rate not improve substantially, circular debt will remain a halter round the neck of the power sector.

The previous two governments of the PPP and the PML-N tried to solve the problem but circular debt continued to grow. Against this background, the present government has decided to eliminate circular debt in stages. At a high-level meeting held a few weeks ago, PM Imran Khan was informed that circular debt, which increased by Rs450 billion during 2017-18, would be eliminated by the next year. The meeting was called to discuss developments in the energy sector during which the premier was briefed by the energy ministry’s power division about reforms in the power sector, including the target to get rid of circular debt by December 2020. Power Division Secretary Irfan Ali informed the meeting about efforts for removing impediments in power transmission, measures to curb power theft and cope with the issue of circular debt.

As of now, circular debt, caused by debt piled up due to electricity leakages, theft and low recovery of bills from many state-owned offices, schools, police stations, mosques, monuments and others, has crossed the Rs1.4 trillion mark. The meeting was informed that circular debt would be brought down to Rs293 billion during the current year and to Rs96 billion by 2019-20. The prime minister was told that a 25-year plan for coping with the demand and supply of power had also been formulated. A further step in this direction is to tap alternative sources of energy. A fresh policy for power production through alternate energy resources has been formulated under which 20 per cent of total electricity would be produced from alternate resources by 2025, which would be enhanced to 30 per cent by 2030.

Simultaneously, the ministry has launched a new drive to curb power theft and recovery of dues which has produced positive results. Within four months, the additional power dues worth Rs48 billion had been recovered that would touch the Rs80 billion mark by year end and Rs190 billion till June 2020. In this context,  special focus has been given to handling the losses caused by theft, technical and transmission issues. As part of the drive to curb power theft, 27,000 first information reports (FIR) had been registered against those involved, while 4,225 people were arrested, including 433 officials of the power sector. Moreover, another 1,467 officials had been charge-sheeted.

Another heartening development is that the production capacity of the power system has been enhanced by 3,000 megawatt (MW) through addressing 15 major shortcomings. An important issue of the power sector is the rising in electricity tariff. It is said that the previous governments had failed to incorporate the expenses incurred on net hydel profits and different power projects in the power tariff, which was resulting in consumers bearing an additional burden. The previous governments announced subsidies for different sectors but had not allocated the required amount in the budget which made the power sector suffer. But the shortcoming has now been overcomed as result of which power tariff will be rationalized, bringing relief to the consumers.