ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet has reportedly proposed alteration in Circular Debt Management Plan (CDMP) to minimize reliance on subsidy and assurance from Discos on delivery of targets. The Power Division, in its summary shared with the ECC stated that the government is continuously working towards the resolution of the multifarious challenges surrounding the power sector. One such major challenge is circular debt, which stood at Rs. 1.614 trillion at the end of FY-2025.
An increase in circular debt accentuates the already constrained supply of electricity, which results in a slowdown in economic growth. Accordingly, there is a need to address the flow of the circular debt through effective efficiency improvement measures.
The Circular Debt Management Plan (CDMP) 2025-26 intends to reduce the flow of CD to its minimum possible level.
The Circular Debt (CD) flow was Rs. 57 billion for FY-23 and Rs. 83 billion for FY-24. For FY 2024-25, the CD flow is negative Rs. 780 billion. In the past, the flow of CD accumulated owing to several parameters, inter alia, Discos under recoveries, line losses above regulatory targets, unpaid/unbudgeted subsidies, pending generation cost, non-payment by K-Electric, markups, etc.
In the last Financial Year, a substantial reduction in CD flow has been achieved through DISCOs over -performance, strengthened economic parameters, and waiver of late payment interest after re-negotiations of power purchase agreements.
Power sector’s circular debt hits Rs1.6trn mark: CPPA-G
To ensure effective management of circular debt, there is a need to address the flow of circular debt through effective efficiency improvement measures. CDMP intends to reduce the flow of CD to its minimum possible level. The Plan covers the Financial Year 2025-26 and describes the mechanism to address the CD issue in the Pakistan power sector. The Plan also envisages measures to reduce the stock of circular debt by paying off the arrears of power producers. The gap in consumer reference rates and the projected cost of supplying power will be mitigated through timely tariff increases. The Plan also assumes that GoP committed subsidies will be budgeted properly and released on time.
The uncertainty of assumptions set, developed for the formulation of CDMP, has implications for forecasting accuracy. Fuel price volatility, economic parameters variation, resource availability, change in Commercial Operations Date (COD) of upcoming power plants, etc., represent major sources of uncertainty. Similarly, changes in demand, consumer mix, generation mix, KIBOR, local inflation, imported coal price, LNG, and crude oil prices have major implications on power purchase cost. Accordingly, a new iteration for forecasting of power purchase price, which is around 85-90% of the total power sector revenue requirement, has been carried out for FY 2025-26. Likewise, the projections assume aggressive improvements in DISCOs’ operational inefficiencies, recognizing that these are driven by a mix of internal and external factors, some within management’s control and others beyond it.
Based on the latest assumptions as accounted for by Nepra in its determination of power purchase price references dated 23rd June 2025, the Power Division has developed the Circular Debt Management Plan FY 2025-26 covering the budget allocational decisions taken by the Finance Division. Without any interventions, the base case circular debt flow on the latest assumptions for FY 2025-26 was expected to be Rs. 734 billion, which is planned to be mitigated to zero in the CDMP FY 2025-26 through timely tariff increases, improvement in losses, and fiscal support. After a substantial reduction in budgeted subsidies, the DISCOs have been assigned strict and ambitious performance targets to enhance operational efficiency, reduce losses, and improve revenue recovery. The Power Division is committed to ensuring rigorous monitoring, providing necessary policy support, and driving reforms to achieve sustainable improvement across the distribution sector. Approval of CDMP by Cabinet is also required to be in place under the MEFP agreed with the IMF. The ECC discussed the proposed CDMP and raised questions on the projections of Power Division.
Copyright Business Recorder, 2025
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