The circular debt continues to be a growing challenge, literally, and it’s the real pain in the energy sector. The proposals of tariff rationalization and circular debt are being rejected by the IMF, and the Fund has emphasized the need for a “sustainable reform plan” that avoids the use of “supplementary grants which have placed a considerable burden on the fiscal accounts in recent years”.
Thus, reforms coupled with tariff increases are the only solution to move forward. In this regard, gas prices have already increased and to limit the burden on low-income households and industry, the prices of fertilizer manufacturers are rationalized. The next in line are electricity prices where another round of increase is warranted.
Over the last two years, the government has increased the base price of electricity and levied additional surcharges like the Power Holding Limited (PHL) charge, which does not have an end in sight. As a result, we have observed an increasing cost of living crisis as electricity bills assume a larger portion of the average household income. The propensity to pay is decreasing and electricity theft may also be increasing.
Surprisingly, the NEPRA State of Industry Report 2023 shows a marginal increase in the overall recovery of bills in the country from 92.3 percent to 92.4 percent. However, still, due to external factors, the circular debt has increased by another Rs236 billion.
And even the recovery improvement is more of a twist, as a deeper look at the data shows that the better-performing DISCOs have over 100 percent recovery from Government departments, which indicates that they may be clearing historic dues- such as, PESCO Govt customers paid 108 percent of their bills; IESCO recovery stood at a whopping 126 percent; GEPCO collected 128 percent; LESCO toll stand at 132 percent. This cannot be sustained.
And the cherry on the top is that with the government itself being cash-strapped, these payments are being served through borrowing – hence overall fiscal debt is rising. This once again raises concerns over the stability of the sector, as well as the authenticity of the data being used to drive decision-making.
Naively, the SOI suggests that capacity payments – a major contributor to circular debt - can be reduced by boosting electricity sales, but this also flies in the face of current economic conditions. In FY 24, Capacity charges are already projected to be twice as high as energy charges, and if economic conditions are not brought under control, this issue will snowball into an avalanche.
Energy has always been a complex, multi-layered portfolio where everything links precariously with everything else. Unfortunately, successive governments have been caught in the quagmire of addressing immediate issues at the cost of long-term reforms.
Now there is no escape from the fundamental reforms (as suggested by the IMF) and negotiations with the IPPs on debt repayment. What these sustainable reforms will look like, and whether there will be enough stability allowing these to be implemented is a pertinent question to ask.
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