Having shot up to nearly Rs2.4 trillion by the end of FY24 – adding Rs140 billion in two years, the power sector circular debt buildup has slowed down appreciably over the first five months of FY25. Although the circular debt stock at Rs2.83 trillion by the end of November 2024 is only Rs11 billion shy of the FY24 year-end level – the pace of accumulation has visibly slowed down and more importantly, is a massive Rs380 billion improvement from the same period one year ago.
The biggest positive contributions have appreciably been made by losses inefficiency and under recovery of distribution companies. The combined contribution of the aforementioned indicators to the circular debt build-up had amassed to a record Rs591 billion by the end of FY24. That had necessitated a record-high payment of Rs374 billion through fiscal space, in addition to prior year tariff adjustments, to keep the annual flow to Rs84 billion.
Then came the tariff rebasing exercise at the beginning of July 2024, freeing up close to Rs200 billion from the circular debt build-up. The adoption of the Circular Debt Management Plan (CDMP), may not have been the smoothest transition, but it has so far meant the accumulation of arrears on account of pending generation costs, related to quarterly tariff adjustments and monthly FCAs, has gone down considerably.
At the end of 5MFY25, the savings on this account are close to Rs180 billion compared to the end of FY24, as Nepra has continued with timely automatic notifications of regular quarterly tariff adjustments (QTAs) and monthly fuel cost adjustments (FCAs) to capture any gaps between the base tariff and actual revenue requirements that arise during the year, to prevent CD flow. It has helped that fuel costs have remained lower than the referenced tariffs, making the adjustments a much easier exercise than before.
It is still early days to make a final call on the financial implications of discos’ inefficiencies for FY25 – but early signs are encouraging. The under-recoveries, which have historically been the single largest contributor to the circular debt build-up, were at the lowest in three years, by November 2024 ending at Rs76 billion – nearly half the levels seen a year ago. That said. much remains to be seen on this front as inefficiency-related financial losses usually mount in the last quarter.
With the IMF’s structural benchmarks on the privatization of discos fast approaching, the authorities must not budge under the usual political pressure and bureaucratic red tape. Concession arraignments for some discos have already been approved and two discos are supposed to be now prepared for transactions with the help of technical advisors. It is worth mentioning the government has agreed with the IMF to issue the RFP for the first DISCO concession by end-May 2025 and the RFP for the first DISCO privatization by end-September 2025. Similarly, to continue the good work on CDMP, the Transmission System Expansion Plan needs to be taken with a greater sense of urgency.
The relative calm today must not serve as an invitation for complacency, which has oftentimes in the past undone hard-earned gains in the energy sector.
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