Circular debt in energy sector rises to Rs5.5tr, WB urges further reforms

The World Bank reported a significant rise in Pakistan’s energy sector circular debt, now totaling Rs5.5 trillion or approximately 5.1% of the country’s Gross Domestic Product (GDP) as of the end of January this year.

This increase comes despite efforts to mitigate the issue through price adjustments and a nationwide campaign to curb theft and defaulting on bills.

According to the World Bank, the power and gas sectors have seen circular debts swell by an average of Rs135 billion monthly, emphasising the urgent need for the Pakistani government to enhance efforts in recovering the actual cost of energy supplies.

The Bank underscored that despite the government’s comprehensive reforms in the power sector aimed at curtailing the growth of circular debt, more substantial actions are necessary to address the ongoing challenges.

The report also highlighted a sharp rise in energy inflation, which escalated from 40.6% in the first half of the fiscal year 2023 to 50.6% in the same period of fiscal year 2024, driven by significant hikes in domestic energy prices.

Despite these measures, circular debt in the power sector alone grew by an average of Rs66.14 billion monthly, reaching Rs2.635 trillion by the end of January, up from Rs2.172 trillion at the end of June 2023.

The gas sector witnessed a similar trend, with its circular debt increasing by Rs68 billion monthly to Rs2.866 trillion over the same period.

The World Bank has called on the Pakistani government to persist with its reforms in the energy tariff structures for both electricity and gas to better reflect the cost of supply and to manage the escalating debts in these sectors.

It noted that structural challenges, inadequate planning, and extensive subsidies have led to significant inefficiencies and deficits in the power sector, highlighting that Pakistan has the highest energy subsidies in South Asia, amounting to about 0.9% of its GDP.

The persistence of these issues, including non-reflective tariffs, operational inefficiencies, and high levels of theft, has hindered revenue collection, further exacerbating the circular debt situation.

The Bank also pointed out the negative impacts of “take-or-pay” contracts signed in 2018 for imported coal and gas power plants, which have increased capacity payments and exposed the country to international fuel price fluctuations.

To address these challenges, the World Bank recommended several measures, including privatization of distribution companies, reduction of generation costs, increased use of renewable energy, and improvements in regulatory capacity.

Acknowledging Pakistan’s potential for hydro, solar, and wind energy, the Bank advised on the need for a strengthened and expanded transmission grid to accommodate the seasonal fluctuations in demand and leverage the country’s renewable resources effectively.