Govt aims to contain circular debt surge through timely tariff increases

November 04, 2024 (MLN): Pakistan's circular debt is projected to rise by Rs1.077 trillion in FY 2024-25, which is planned to be mitigated at Rs36 billion through a Circular Debt Management Plan (CDMP) FY 2024-25, according to a Power Division document seen by Mettis Global.

The CDMP, which aligns with the Finance Division’s budget allocation decisions, aims to reduce this debt flow through timely tariff increases, improvement in losses, and fiscal support.

To note, the circular debt stood at Rs2.393tr at the end of FY-2024. An increase in circular debt accentuates the already constrained supply of electricity which resultantly slows down economic growth.

Accordingly, there is a need to address the flow of the circular debt through effective efficiency improvement measures.

The CDMP intends to reduce the flow of CD to the minimum possible level, Power Division says.

CD has historically been driven by the failure of tariffs to keep pace with prices (although more regular tariff increases over 2023-24 helped to moderate CD flow); inefficient management of distribution and transmission companies and under-collections; and delayed maintenance coupled with weak transmission and distribution infrastructure. 

There is a need for fundamental energy sector reform to reduce fiscal risks, ensure viability of the sector and debt sustainability, and build a business environment conducive to dynamic growth. 

Cabinet approval of the CDMP is required as part of the Memorandum of Economic and Financial Policies (MEFP) agreed upon with the IMF for the ongoing program. A draft summary has been circulated to the Finance Division for review and comments.

Moreover, the approval of the Economic Coordination Committee (ECC) has also been sought for the Circular Debt Management Plan FY 2024-25.

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