OPINION: Challenge of power sector circular debt

Pakistan has been undergoing the never-ending rigmarole of refinancing the power sector circular debt. It is never ending - as successive governments have been refinancing the symptom and ignoring the disease.

Pakistan’s latest outreach to the Asian Development Bank (ADB) for substantive additional debt to retire the remaining Rs1.7 trillion circular debt and refinance part of the recently acquired Rs1.25 trillion commercial financing may provide short-term breathing space. But it once again exposes a chronic policy reflex: treating the power sector’s circular debt as a financing problem rather than a governance failure.

At one level, the logic is understandable. ADB financing is cheaper than market borrowing, offers longer tenors, and can soften the immediate pressure on electricity tariffs. With ADB’s exposure already at around $17 billion — Pakistan’s third-largest creditor after China and the World Bank — the multilateral lender is a natural candidate to help restructure expensive power sector liabilities.

Longer repayment periods and lower interest rates could allow the government to retire debt without fresh budgetary injections, relying instead on tariff-based repayments at rates lower than those currently choking consumers and industry.

Yet this approach is not new. For over a decade, successive governments have periodically “solved” the circular debt through injections, bank borrowing, guarantees, sukuk issuances, and now multilateral refinancing.

Each time, the stock temporarily declines — only to resurface within months. The reason is simple: the core drivers of circular debt remain intact, protected by political expediency and institutional incompetence.

Circular debt is not merely an accounting imbalance. It is the cumulative outcome of gross mis-governance across the power value chain — generation, transmission, distribution, regulation, and policy.

Losses at distribution companies (DISCOs), weak recoveries, theft, delayed subsidies, capacity payments disconnected from demand realities, and poor planning have created a system that bleeds cash daily. Refinancing the debt does nothing to stop that bleeding.

Pakistan’s circular debt has quietly grown into one of the most debilitating structural faults in the economy.

Unlike headline-grabbing fiscal or current account deficits, circular debt operates like slow poison — invisible to most consumers, yet steadily choking the energy sector, distorting prices, scaring investors and draining public finances. With the stock now hovering around Rs5 trillion, it has become less a technical problem and more a symbol of chronic mis-governance.

At its core, circular debt is simple: power producers are not paid on time, fuel suppliers are left unpaid, banks step in to bridge the gap, and the government ultimately absorbs the cost. But the causes are anything but simple. They lie in a toxic mix of underpricing, political interference, inefficiency, theft, weak regulation and ill-conceived contracts.

Successive governments have treated electricity tariffs as a political weapon rather than an economic signal.

Power has been sold below cost for years, with the difference parked as “payables” instead of being transparently budgeted. When tariffs are finally adjusted under IMF pressure, the increase is abrupt and socially painful, triggering backlash — and often reversal. This stop-go pricing policy ensures that circular debt never shrinks; it merely changes hands.

Distribution companies (DISCOs) remain the system’s weakest link. Line losses, theft and poor recoveries — particularly in high-loss regions — continue despite decades of reform talk.

The problem is not lack of diagnosis but lack of enforcement. No private firm could survive with recovery rates of 70–80 percent, yet public DISCOs operate with little accountability. Political patronage protects inefficiency, while honest consumers subsidise theft through higher tariffs.

Then there are the capacity payments — fixed obligations to independent power producers (IPPs) regardless of actual electricity demand.

Pakistan contracted generation capacity based on overly optimistic growth projections and expensive fuel mixes. Even when power plants sit idle, the government must pay billions every month. This design flaw has turned circular debt into a quasi-sovereign liability, similar to public debt but without the scrutiny.

The IMF, rightly, insists that circular debt cannot be fixed through accounting tricks. Its governance diagnostics point to structural reform: cost-reflective tariffs, targeted subsidies, privatisation or professional management of DISCOs, renegotiation of contracts, and strict enforcement against theft.

Yet these measures collide head-on with political realities. Energy reform creates losers immediately, while benefits accrue slowly — a mismatch no elected government likes.

Breaking this cycle requires political courage and administrative discipline. First, losses must be ring-fenced and assigned responsibility — feeder-wise, DISCO-wise, manager-wise. Second, subsidies should be explicit, targeted and budgeted, not hidden in arrears.

Third, demand growth must be encouraged through competitive tariffs for industry, not strangled by ever-higher rates to cover inefficiencies. And finally, energy planning must shift away from capacity obsession toward affordability and flexibility.

As long as Pakistan avoids hard decisions and relies on rollovers, lenders and patches, the debt will persist. The choice is stark: reform the system now, or let circular debt continue to silently tax growth, punish honesty and undermine sovereignty.

Copyright Business Recorder, 2025