Despite a 51% increase in electricity prices in July, the government warns that the circular debt in the power sector could reach a new high of Rs2.8 trillion by the end of the current fiscal year without additional budgetary subsidies.
Sources from the Ministry of Energy informed The Express Tribune that the circular debt is expected to increase by Rs417 billion in the fiscal year 2024-25, even with the recent tariff hikes.
As of June this year, the circular debt was already at Rs2.383 trillion, surpassing commitments made to the International Monetary Fund (IMF) and exceeding the limits set by the federal cabinet under the Circular Debt Management Plan for 2023-24.
When factoring in the projected Rs417 billion addition, the total debt could rise to Rs2.8 trillion due to ongoing sector losses and inefficiencies.
According to the agreement with the IMF, the government plans to allocate Rs381 billion in subsidies, which would limit the debt to Rs2.42 trillion by June of next year. However, the Power Division has a history of failing to meet the debt reduction targets established by the IMF and the cabinet.
Power Secretary Dr. Muhammad Fakhre Alam did not respond to inquiries regarding the new targets.
Last year, the focus of bureaucracy appeared to be more on launching campaigns rather than achieving meaningful improvements in the energy sector. The energy policies dictated by the World Bank and IMF, coupled with the government’s inability to address theft and losses, have led to a situation where the circular debt remains unresolved and electricity costs continue to rise.
Currently, the average electricity price for residential and commercial consumers ranges from Rs64 to Rs72 per unit, including all taxes and surcharges.
Prime Minister Shehbaz Sharif has approved an additional increase in electricity prices of up to Rs7.12 per unit, or 51%, for the current fiscal year. These new rates are already in effect, except for consumers using up to 200 units per month, for whom the new rates will take effect on October 1.
Rather than ensuring real improvements in the energy sector, the coalition government has raised prices for 32.5 million consumers, primarily households. Among these, 26 million belong to the poorest and low middle-income groups, who have experienced the most significant percentage increase in prices.
Sources indicate that under the new Circular Debt Management Plan, the debt is expected to rise by Rs245 billion to reach Rs2.63 trillion during the first quarter (July-September) of the current fiscal year. This increase is largely attributed to low subsidy payments, estimated at only Rs12 billion for the quarter.
By the end of December, the Power Division anticipates that the circular debt will exceed Rs2.7 trillion, representing an increase of Rs330 billion in the first half of FY25.
It is projected that by March 2025, the circular debt will reach a peak of Rs2.8 trillion. However, the Ministry of Finance plans to inject Rs381 billion in subsidies to reduce the debt to Rs2.42 trillion before the end of the current fiscal year. This will still result in a net increase of Rs36 billion.
Last fiscal year, the IMF mandated that the government should maintain a zero increase in the debt stock of Rs2.310 trillion, backed by an Rs8 per unit tariff increase and substantial budget subsidies. Nevertheless, the debt rose to Rs2.383 trillion by June this year.
Electricity prices have become unaffordable for many Pakistanis due to ongoing tariff hikes aimed at covering losses and inefficiencies in the power sector. In July 2022, the government raised the tariff by Rs7.91 per unit, followed by another increase of Rs8 per unit in July 2023.
For the last fiscal year, the Ministry of Finance allocated Rs976 billion in subsidies to maintain the debt at Rs2.31 trillion in accordance with the IMF agreement.
Additionally, the government has imposed a debt servicing surcharge of Rs3.23 per unit to manage the debt held by a holding company, but this does not cover the interest payments owed to Independent Power Producers (IPPs) due to delayed payments.
Last year, the Pakistan Democratic Movement (PDM) government initiated an anti-theft campaign supported by the Special Investment Facilitation Council. The former power secretary, who is now the chairman of the Federal Board of Revenue (FBR), proposed appointing senior officials from three intelligence agencies and the police to power distribution companies to combat electricity theft.
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The rise in circular debt is largely due to poor recovery rates by distribution companies, high system losses, unpaid generation costs, non-payments from K-Electric, and interest charges. The most significant increases in debt typically stem from distribution companies’ inefficiencies, under-recoveries, and losses.
On Monday, Jamaat-e-Islami renewed its threat to protest after its 45-day deadline for lowering electricity prices expired. The government presented a Rs2.8 trillion plan to the IMF aimed at reducing prices by Rs6 per unit, but the lender rejected the proposal, citing insufficient data.
